Thursday, 11 August 2011

Let's Talk About Growth

This story would probably have received a great deal more airtime than it has, were it not for some of the more eye-catching events of the last week or so. As it is, Mervyn King's re-assessment of the Uk growth forecast in a downward trajectory from 1.8% to 1.5% has found itself distinctly overshadowed - perhaps several nights of riots and looting are 'a good way to bury bad news?'.

It is not terribly easy to take George Osborne seriously, more than anything because of the 'work experience' look that he has about him. Sure, he does resemble a particularly malign lovechild of Mr Bean and Uncle Fester, but then very few of us are oil paintings (this bunny certainly isn't), so it would be both stupid and somewhat cruel to dwell on that for too long. I don't know about you, but I've never quite convinced myself that he actually is the Chancellor of the Exchequer. This bunny half-expects to switch on the television one afternoon to hear an announcement that the whole thing was a wind-up and an adult will now be doing the job with immediate effect. For all his numerous and various faults, 'the Son of the Manse' at least had some sense of ministerial gravitas about him...

So when Osborne tells us he remains committed to his 'tough' deficit reduction programme, I can't help but smile even if what's on the table remains a fraction better than the mainstream alternative. Apparently Ed Balls has chirped up something on the subject as well, predictable stuff about corpses rotting in the street while bankers light cigars with fivers. You can usually assess one's judgement by their choice of heroes and the strength of their conviction by the names of their enemies. If, as is the case with Balls, Gordon Brown is your idol, then I 1) feel awfully sorry for you and 2) do not want your advice on fiscal and economic policy under any circumstances. It would be much akin to taking racing tips from Stan Bowles, and would in all likelihood end with very similar results.

Osborne vs Ed the Brown-noser is the rather pitiful choice we have in front of us, and so it is probably no surprise that their potential solutions to our current state of economic inertia carry all the boldness and inspiration of a dreary Sunday watching 'Songs of Praise'. Sure, we need to eliminate the fiscal deficit in a few short years, and in that sense, kudos to the coalition for being but a cigarette paper ahead of the opposition. The current woes of Greece, Ireland, Portugal and even the United States serve as an illustration of what happens when governments continue to bury their heads in the sand. However, deficit reduction will mean nothing in isolation if it is funded only by modest spending cuts and punitive tax increases. If we're serious about growing our way out of this mess, then tax cuts, funded by deeper spending cuts if necessary, are the only credible way that this can be achieved.

The 'harmonisation' of VAT to the continental level of 20% is something the coalition will almost certainly live to regret, while the tinkering of the previous government, temporarily reducing the levy to 15%, was too insignificant to actually work. In reality, VAT needs to be abolished altogether and, if we want to fill a part of the black hole, replaced by a sales tax that should be set at a local level. The desire to bring consumers and enterprise to a town or city will force the local authority into keeping the tax as low as possible, and would have some positive effects for all concerned. Businesses will benefit from being able to sell their products at a lower retail price, while not being burdened by the extra workload and expense that comes with administering VAT. The wages of ordinary people will possess greater purchasing power, while bills on domestic fuel are reduced. Removing this regressive and short-sighted tax should be a high priority for any government serious about economic growth.

The principle of 'income tax is theft' should be a good one from which to start any serious analysis on the subject. Of course, Statists believe that it is actually their money, so you should be enormously grateful for the small percentage of it you are allowed to keep. While the 'aspiration' of raising the personal allowance to circa £12,000 is a noble one, failure to solidly commit to it as a policy leaves any government with a degree of wriggle-room with which one cannot be comfortable. First up, it should be set in stone as a firm commitment, with a final date by which the new threshold should be implemented. Moreover, the figure of £12,000 is too low, and somewhere around the £15,000 mark would make more sense. At that point, a very important principle should be established.

Those earning more than £15,000, who still benefit from the increased personal allowance, would not qualify for any state handouts whatsoever, while anyone below the threshold would naturally be exempt from direct taxation. This would mean that an individual either pays into the income tax system or receives some sort of cash benefit, but not both at the same time. The churning and recycling of people's money is an expensive and bureaucratic business that 'requires' a bloated state payroll, while creating real confusion as to who is a nett contributor in these terms. Simplicity keeps costs down while providing some clarity as to where everybody stands.

Employers' National insurance contributions are a punitive tax on jobs and should be scrapped immediately. All legislation regarding 'equal opportunities' ought to be thrown on the bonfire where it belongs, with the army of jobsworths hired to enforce them removed from the place on the payroll with immediate effect. For those who talk about "taking their salaries out of the local economy", two points. 1 - this is simply recycled money which should be returned to the productive side of the economy where it was earned in the first instance. 2 - in that context, paying someone sixty quid a week of taxpayers' money to do nothing of value makes a lot more sense than thirty grand a year to do, er...nothing of value. We need to get away from this notion that the state can 'create' jobs at the cost of no others. Much of the lucrative 'Health and Safety' industry, which has become a depressing parody of itself, should follow the PC bonanza and be fed to the flames.

Fuel duty may have become a money spinner for the state, but produces all sorts of unintended consequences in the economy and should be significantly reduced.

All of this of course needs to be paid for, and what I'm setting out is in addition to those spending cuts that are already on the table. Retaining international confidence and possessing some sort of credible fiscal plan is important, while creating the conditions in which growth will overturn what is left of the deficit.

Once we have removed the lowest-paid from the burden of income tax, the cumbersome, expensive and counter-productive tax credits system can be deleted immediately. The manner in which the state snatches money from those of least means and then hands a fraction of it back to them as a 'credit' convinces the individuals concerned that they 'need the state to survive'. This is deeply immoral as well as being economic madness. Get nanny out of the picture and make low-paid work pay significantly more than a life on welfare - as ManNotNumber rather excellently put it in his post 'Incentives', people are not stupid and will let their noses follow the money. Child benefit can also be capped at a maximum of two children. The state, by making the business of breeding a lucrative one, has created the unintended consequence of state dependants having too many dependants of their own - time to apply the brakes.

There are no sacred cows, and spending on the NHS should be as open to scrutiny as any other area of state expenditure. Once you establish that any department is untouchable, then waste and complacency are inevitable by-products. Vouchers can be introduced in both health and education to increase consumer choice - this will mean that the efficient and well-run state institutions will thrive, while those that cannot retain enough of their customers go to the wall as any private entity would. State healthcare and education would only become the 'economy class option' if they deserved to be on a regional level, and anyone who thinks this to be an obscenely radical solution should hear what Malpoet has to say when he comes on, and think again...

Tertiary education should once again become the preserve of the most academically able. The false promise of 'degrees for all' has created an unsustainable model and a thoroughly avoidable funding crisis. By sending fewer young adults to university and restoring the status of degrees as an elite qualification, we can then look again at the volume of money currently contributed by taxpayers. In these new circumstances, this pot of money can be cut again, leaving enough aside to protect the most extreme and unusual cases.

The budgets for culture, the arts, sport and International Aid should all be phased out and reduced to zero over a three year period. 'State art and culture' is synonymous with totalitarian regimes and has no place in a free society. Leave artists, the arts and those that love them to pay for themselves instead of relying on money stolen from others who perhaps don't, compromising the content as a result. National Sports Associations should find their own way by which the revenue they generate can fund their games at grass roots level.

International Aid is a concept so riddled with holes that it could (and no doubt will) be a separate post all of its own (in the meantime, Malpoet's thoughts on the subject make for compelling reading - While seeing next to nothing in return for the billions poured in by taxpayers, we also hear the horror-stories of money falling into the hands of tyrants, propping up their corrupt and violent regimes. The proposal of forcing future governments to spend 0.7% of GDP on International 'Development' is also one of the most anti-democratic and unconstitutional ideas I've heard for many years. This experiment in student 'feelgood politics' needs to be written off as the juvenile failure that it is.

Finally, a 'tax increase' of sorts - if you want to raise billions of new revenue quickly, simply legalise recreational drugs and apply a sales tax to them. This issue must represent something of a dilemna for the Statist - a choice between banning something or creating an excuse to snatch yet more of someone else's money. In reality, prohibition never works, and simply hands the natural demand of the market over to criminals in the black or informal economy, so aside from the obvious personal choice questions, it's something of a fiscal no-brainer for this bunny. Take care and I'll see you tomorrow.


  1. I am now convinced that there will be no meaningful change until the moneychangers have completely destroyed the currency. Low interest rates are destroying savers and price inflation hurting those on fixed incomes.

    It is no longer helpful to measure things in GBP. If you take the example of housing, the "price" of housing in gold has been in freefall since 2007, however most people are blissfully unaware of this as their "nominal" house price has held up in GBP.

    We are entering into unchartered territory with fiat currency. It is time for those who have ears to protect themselves.

  2. MNN that's an interesting observation. I wonder how long it will be before we take to printing a load more money?

    According to Statists, this does not cause inflation, contrary to all logic. Maybe the mint and Mickey Thomas can come to sort sort of deal in that case?

  3. Really thought provoking post there Daz, and some very interesting economics, certainly better than any politician I've heard anyway; downright brilliant in fact! Oh, and you are right about dreary Sundays and 'Songs of Praise!

  4. Daz,
    Did you ever study economics?
    There is no Continental VAT rate of 20%.It ranges from 15% in Luxembourg to 25% in Sweden. Also most european countries have reduced rates on certain goods, with some essentials being VAT exempt. This again varies from country to country so there is no harmonisation to speak of even whithin the eurozone. Some countries like France have extended the reduced rate to food in restaurants and bars to stimulate demand. Now that is an approach I support.
    Replacing with a sales tax set at local level would be cumbersome and expensive to administer and completely unworkable in today's world. Retailing these days is dominated by chainstores. I would not like to have to so the "Sales Tax" returns for Marks & Spencer under your regime. In the case of manufacturing it is easy to get round, put your sales office in the town setting the lowest rate, your manufacturing site can be anywhere. It might benefit small businesses that operate on a truly local basis. But businesses are exempt from charging VAT if they turnover less than £73K, so your regime would actually penalise the very small businessman.
    I agree in principle with the idea of raising the threshold for tax to a higher level, to take the lowest paid out of tax completely. However it can act as a disincentive. Once you start earning over £15K all of a sudden its a double whammy, you start paying tax and you stop getting benefits. This could be a recipe for disaster with people being paid £15K through the payslip then additional payments under the counter to avoid hitting the threshold- a huge loss to the exchequer.
    What you also have to take into account is that £15K might be a living wage in Kingston upon Hull, it is not in Kingston upon Thames!
    I agree that employers NI contributions are a tax on jobs, but if you abolish it where do you get the revenue to replace it? If employees have to pay it instead (as well as their own contributions)they will demand more pay, if the employers pay more then you are back to square one. So you would have to recover this revenue from somewhere else in the economy (perhaps its going to come from your local sales tax).
    I am not going to comment on your views about scrapping equal opportunities legislation. It reveals more about your politics than your approach to economics.
    The chances of being shot or stabbed are extremely remote, despite what the Daily Mail would have us believe. The chances of being killed or injured in a road accident are a thousand times more likely. But both of these pale into insignificance compared to either being killed or maimed in an industrial accident or worse still dying a slow lingering death through having contracted an industrial disease. Sometimes Health and Safety goes too far and makes a good tabloid story but 99% of the time it is saving lives and is good for business. Most businesses know that lost time through accidents and injuries far outweighs the costs of implementing safe working practices. The best companies go beyond what is demanded by legislation.
    I agree with your views on tertiary education. As well as flooding the market with more graduates than are required to stack the shelves at ASDA, it is also a big con trick. Somehow and I'm not sure how they managed it Tony Blair's goverment actually persuaded young people to keep themselves off the dole by financing themselves (by taking out a student loan) to go to university to do media studies. Ultimately we are the losers because the majority of these loans will never be repaid in full.

    I will complete in a following comment

  5. Part 2

    In an ideal world art would pay for itself and the most talented artists would become wealthy in their own lifetimes. History tells us that this is not the case. So unless you want a diet purely of Rhianna and Katy Perry your gonna have to make a small contribution.
    With regard to International Aid, I agree its a subject on its own. As a country our contribution to International Aid as a percentage of GNP is no more than average, so we are not exactly a soft touch.
    Your last suggestion is probably a little too radical for most of the electorate, so I don't think you can rely on this to make up for lost revenue.
    So in your first attempt at playing Chancellor of the Exchequer you have spectacularly failed to balance the books! This might get you into the shadow cabinet, but it won't impress your Tory chums.
    Now I suggest you go and read:"The Wealth of Nations" by Adam Smith. Then resubmit this essay.
    I'm off for a wank.

  6. It don't make no difference to me what the tax rate is, I don't pay any. And if you think am gonna srart paying tax on me drugs yer avin a larf!

    £15K a can make that in a week doing a cabinet minister. I had a permanent under secretary up me snatch last week and junior minister up me shitter at the same time!

    When they said they were going to teach me double entry I thought they were gonna show me how to do book keeping!

  7. Thankyou all for contributing

    Voice, many thanks for that 'additional information' - have fun...