Friday, November 28, 2008

The Chancellor's New Clothes

The Pre-Budget Report looks progressive at first glance, but despite some token steps in that direction it's mostly more Socialism for the Rich and more shafting people on low incomes and 'struggling families'. It's not the 'irresponsible borrowing' the Conservatives claim it is either though

The government is proudly boasting a 5% increase in tax rates on incomes over £150,000 a year, a 2.5% cut in VAT, increased tax credits for people on low incomes and even an increase in child benefit from £18.80 to £20 per week for the first child in a family and from £12.55 to £13.20 for 'subsequent children'.Does their generosity know no bounds? Are they the most progressive government in living memory? Not really.

Nor, though, is this the dangerous irresponsibility the Conservatives have tried to paint it as based on their economic illiteracy.

45% top rate of income tax is fair enough - but what about the billionaires and the big firms - shouldn't they pay a higher rate than someone on £150,000 a year?

Increased taxes on high earners would be fair enough if they were used to cut taxes on low earners and focused especially on the very highest earners.
A 45% rate on people earning over £150,000 is fine, but what about tax increases on big companies and billionaires like News International, Rupert Murdoch, Mittal Steel, Lakshi Mittal and Sainsbury's and Lord Sainsbury, or the big oil companies who've raked it in from the increases in oil prices caused by wars and terrorism? Well it seems Gordon frankly doesn't have the 'moral courage' to tax people whose newspapers might criticise him or who donate millions to Labour party funds.

Some people might answer that these firms and billionaires would simply move to tax havens if a higher tax rate was put on them. Those tax havens could be closed down by the OECD by simply placing tourism bans and sanctions preventing the transfer of money to their banks until they provide information on bank accounts in their territory and raise their income and corporation taxes to agreed OECD minimum levels. The OECD has in fact proposed these kind of measures before - they were blocked by the Bush administration and a certain Chancellor of the Exchequer in the UK.

It's also not credible that Murdoch would give up his influence in UK politics by closing down his newspaper operations in the UK - and if he did he'd merely sell them on to another employer. Nor is it credible that oil companies would leave the North Sea - they can hardly take the oil with them if they leave after all - and as oil starts to become in shorter supply in the decades ahead they'll want some of the profits from it

VAT cuts are good - but a temporary 2.5% cut doesn't do much for anyone

A cut in VAT is certainly positive, since as a sales tax it taxes everyone at the same rate, with no connection to how much they can afford to pay (their income). However 2.5% off is not going to prevent any bank accounts being broken - and since VAT isn't charged on essentials like food or clothes(thankfully) a cut in VAT won't reduce the price of either essential for people on low and middle incomes.

What's more the government's made it clear that this is only a temporary cut to boost the economy, not a permanent one in the interest of fairer taxes or reducing taxes on low income earners.

The government says that the original treaties which founded the EC (now the EU) prevent it cutting VAT below 15%. That's a weak argument since it's brazenly ignored other treaties its ratified and laws it passed itself - like the Human Rights Act - whenever it's felt like it. So it could do the same on VAT. Also, if it's possible to negotiate concerted action internationally on the economy through-out the whole world it's surely possible to negotiate a cut in the EU's minimum VAT rate.

Why tax credits instead of cutting income tax for low earners?

Increased tax credits for people on low incomes aren't a bad thing, but the tax credit system is ridiculously complicated and time consuming to make an application for credits - and people who apply and are granted reduced taxes sometimes even find they actually shouldn't have got them - and are then charged with fraud.

It's hard to see what reason there could be for not just restoring the 10p tax rate for low earners or even having a 5% rate or income tax exemptions for people on the minimum wage. The only reason i can think of is to save Gordon Brown the embarassment of doing a U-turn, which does not seem like a valid reason.

The 'rise' in Child Benefit is a cut in real terms

Some Labour MPs are proudly boasting of the government's increase in child benefit from £18.80 to £20 for the first child in a family and from £12.55 to £13.20 for each additional child. The first amounts to an increase of just over 1%. The second amounts to just under 5%. The government's statistics show inflation was 4.5% last month. So very roughly for an average family with say 2 children they'll get roughly a 3% increase in benefits (5% plus 1% divided by two - not exact but close enough). That means that unless inflation falls very rapidly they'll actually get a rise in their child benefit of 1.5% less than the inflation rate on prices - a cut in real terms. At best they might break even(if inflation falls by 1.5%) or get an increase of 1 or 2% in real terms if there's massive deflation.

I'm wondering if the PFI consortia who the government insists on constantly handing over-priced contracts to build new hospitals and schools at prohibitive costs (including annual charges lasting decades) have seen their payments fall in real terms too? I doubt it since they get the contracts pretty much their own way every time and 'new' hospitals and schools replace old ones and can afford less beds and staff due to PFI charges.

The UK's National Accounts Office reports that there are now over 500 PFI projects in the UK with a capital value of £44 billion. They don't give any figures on how much NHS trusts and other QUANGOs are having to pay out in annual charges to the PFI consortia. If they did people would rapidly realise that Conservative and Labour governments have been putting us massively in debt for decades now - but keeping it off the accounts sheet by using the fiction that PFI projects arent debts.

Why the government going further into debt doesn't matter as long as the economy starts growing again at some point - which it always does

The Conservatives have attacked the government for supposedly irresponsibly trying to borrow their way out of debt. This is what's known as 'the fallacy of composition', confusing two very different things - in this case confusing how government finances work with how they work for one person or family.
Even for an individual it's quite possible to borrow your way out of debt, if, for instance, you invest the money in a business that starts making a profit or use the borrowed money to make a profit by buying things cheaply and selling them on at a higher price.

For governments this is even more true because as long as the economy of the country isn't totally bankrupt (and it's not, nor even close to it) they can keep getting tax revenues. Developed world governments have excellent credit ratings because they've never gone bankrupt (and are never likely to in the next 50 years at the least). If they borrow money to cut taxes or to create jobs then the extra money spent by taxpayers or going into the pockets of formerly unemployed people will boost the economy and increase tax revenues in the long run.

Economies have always gone through cycles of booms and recessions - but always recover and grow in the long term. There was one long exception - the Great Depression of the 1930s. This was caused by classically trained economists operating on abstract theories about a perfect market which doesn't exist - as the Great Depression and economists like John Maynard Keynes showed.

The free market classical economists had two main theories - first Say's Law - that if you leave the economy alone and do nothing it'll reach a new equilibrium (or balance) and that this will be one in which supply equals demand with full or close to full employment. In fact left to itself the economy can go into a vicious spiral of falling prices leading to falling wages and demand leading to falling prices and so on (a deflationary spiral).

The second theory was the theory of 'sound money' - that governments had to restore sound money by reducing the money supply and returning to the 'Gold standard' (with central banks only issuing an amount of money equal in value to the amount of gold reserves they held). The problem with this was that it reduced the money supply and the amount of money available in loans or credit when there was already a shortage of money and a credit crisis. This resulted in many businesses which were viable in the long run going bust because they couldnt get a loan to tide them over and many people being reduced to unemployment and poverty.

In other words it made things worse, not better.

Only fraudsters or people who don't understand government finance would say that governments have to balance their books - they don't because the economy grows in the long run anyway so they'll always have tax revenue and always have a decent credit rating. What's more if governments don't cut taxes and increase spending during recessions the recessions will last longer and could turn into another Great Depression - and then we'd really be in trouble.

Nor is it credible for the Conservatives or Brown and Darling to pose as fiscally responsible when all of them in government have run PFIs which are in effect massive debts and massive handouts to companies of taxpayers' money when new schools and hospitals could be built far more cheaply by the government taking out a loan to build them. The interest payments wouldnt come to nearly as much as the annual payments they make to PFI consortia and they'd be paid off a lot sooner.

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