POSTED BY WAT TYLER AT 11:25 AM COMMENTS Labels: fiscal policy, taxTUESDAY, MARCH 23, 2010
The Cost Of Denial
"Matters have worsened to the point where the department will have to take difficult decisions, such as to cancel whole equipment programmes."
Tuesday, 23 March 2010
Maybe it was another false alarm
The story so far: Britain stands on the edge of an abyss: Labour has created the biggest fiscal hole anyone can remember; a bigger deficit than any other developed country, even the PIGS; the only reason the bond vigilantes have not yet mounted a raid is because they think the coming election will produce a government committed to national defence of the public finances; within weeks we face a make-or-break trial; yet for most people, the crisis still seems far away: gas-masks were issued months ago but they haven't been needed, and now they're stuffed away in the back of some cupboard; people are questioning the need for any wartime restrictions, and our politicos don't feel inclined to argue; leadership has fled overseas.
Now read on...
Yesterday, thinktank Reform had another go at rallying support for a serious package of fiscal salvation. Pointing out that current plans leave our overall indebtedness (debt-to-GDP ratio) rising for years - maybe decades - to come, they call for a bigger retrenchment than any of our politicos are currently contemplating. By 2013-14 they say we should have reduced annual borrowing from 12% of GDP to 4.5%, and that the vast bulk of the action should comprise spending cuts rather than tax rises.
The headline figures are a £100bn pa fiscal squeeze, £87.5bn of which falls on spending (ie 7 pounds out of every 8, mirroring the successful Canadian programme in the 1990s). Here's their summary comparison against the Labour, Tory, and LibDem plans (click on image to enlarge):
Clearly, the Reform programme requires much bigger public spending cuts than any of the politicos will admit to - £85.7bn vs Labour's planned £57.8bn - but it sounds much closer to what we need. As we all know, the only thing that will rescue us in the long-term is growth, and tax rises will kill growth stone dead.
And Refom also reiterate a couple of points we've made here many times. First, to make spending cuts on the required scale will mean all programmes (including the £110bn pa NHS) have to take a share. And second, much of the cutting will have to fall on the £200bn public sector paybill, and the £200bn pa welfare bill (including the estimated £31bn pa currently spent on middle class welfare). Taken together the paybill and the welfare bill account for nearly two-thirds of public spending.
As a benchmark, Reform have also looked to see what other heavy deficit countries are doing to tackle their crises. From Ireland, to Greece, to Spain, to Portugal, to France, they find some consistent themes:
All very sensible, and the sooner we get started the better.
Ah, but... those discarded gasmasks... where's the politico who's going to speak truth unto the people?
And frankly, where's the politico who's even going to grip the problem post the election? Even if there's a 50 seat Tory majority is that nice Mr Cam really going to cut spending by £87.5bn? Is he really going to attack teachers and nurses and old people and babies and fluffy little lambs?
Or is he going to fall back on that good old British standby - muddling through? Yes, we stand for fiscal discipline and tough decisions, but no, of course we won't attack fluffy lambs... we'll leave that to someone further down the chain of command.
Because that's what happens when Westminster politicos fail to take the really tough decisions - they get passed all the way down to the frontline where decisionshave to be taken. And in the heat of battle, in impossible circumstances, those decisions are often the wrong ones.
History tells us that top politicos sitting in their grandiose Whitehall offices can in extremis be persuaded to cut spending - ie budget allocations. But what they're much less good at is making decisions on which particular fluffy lambs will be sacrificed to realise those cuts.
We have a couple of good examples in the news today - both sadly familiar to BOM readers.
First, the Public Accounts Committee reports a £36bn black hole in the defence budget. Under Liar Brown's stewardship, the MOD has never had sufficient funding for all the various requirements landed on it by the government, and now faces a £36bn shortfall. According to the soon-to-be-retired-and-sadly-missed PAC chairman Leigh:
And we all know how that ends - British troops literally on the frontline being forced to dice with death because inadequate budgets mean they don't have the right kit for the task they've been given.
Second, the College of Emergency Medicine says a key NHS target - to treat people visiting accident and emergency units within four hours - is compromising care and patient safety. Sure, the College has got an axe, inasmuch as their members don't like being pressurised by targets. But as we've blogged before, the NHS target regime has long record of producing perverse results - the tick-box targets get met, but only at the cost of extensive resource diversion from untargeted activities, even where they are also essential. In other words, politicos have passed the tough decisions right down the the frontline, which is where the fluffy lambs have to be dealt with.
How much better it would be if the politicos had the balls to make the real decisions on priorities right there, where the buck ought to stop - with them.
But instead of that we seem to be drifting yet further into a replay of the 70s script, which in case you need reminding, goes like this:
The politicos fail to take decisive action to correct the budget deficit; the market vigilantes attack; the politicos are finally forced into action, but without the breathing space for proper planning; their emergency measures involve big tax rises and big spending cuts; the cuts are across the board, lacking detail on what specific services should go; far down the chain of command, right out at the sharp end, public infrastructure decays, class sizes increase, hospital waiting lists lengthen, and soldiers die.
Don't miss the next exciting episode.
Destroying Jobs
It seemed like a good idea at the time
A very interesting new report from Policy Exchange today. Andrew Lilico and Hiba Sameen have been looking at the effect of various different types of tax on economic growth and employment, and have come up with some striking conclusions.
They've used the Oxford Economic Forecasting model - which is very similar to the Treasury's model of the economy - to analyse the impact of various tax changes. And they raise a big red flag over Labour's planned increase in National Insurance Contributions (NICs).
Now as we all know, National Insurance Contributions are a tax on jobs - pure and simple. They make it more expensive for companies to employ people. When Labour came to power, the standard rate of employers NICs (contracted in) was 10%, but after a string of increases, as from April 2011, they will be 13.8% - one percentage point higher than now.
So Policy Exchange has run the model, and discovered that a 2 percentage point increase in employers' NICs after three years produces a one million increase in unemployment. Which would imply that the planned increase of one percentage point next year will cost half a million jobs.
Now, sure, you can argue with the detailed assumptions built into the model, but this must be pretty close to what HMT discovered when they ran their own model. And yet Brown went ahead with the NICs increases anyway.
When Darling gets up on Wednesday and tells us how they don't need to increase VAT because they've already taken the tough tax decisions, you want to remember this. Labour's planned tax increases are just about the most jobs destructive of all.
PS The Policy Exchange report also has a good summary of the increasing volume of research showing a link between the tax burden and long-term GDP growth (see page 20). For example, a 2008 study of OECD and EU countries over the period 1970 - 2004 found that a one percentage point increase in the share of total tax in GDP reduces output growth by 0.12 percentage points.
PPS Several correspondents have drawn attention to today's report that UK government spending has now reached 52% of GDP, as opposed to the 48% quoted on BOM's sidebar. The 52% comes from the OECD and differs somewhat from HMT's definition of public spending - the source of the 48%. But we're investigating further and will report back.
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