Throttling The Goose

http://burningourmoney.blogspot.com/

WEDNESDAY, APRIL 07, 2010

Throttling The Goose

Wake up Polly

According to the Office for National Statistics, the richest 10% of households pay a quarter of all personal taxes (including income tax, National Insurance, VAT, Council Tax, and sin duties). 

Good thing too, you say - they're rich, so they can afford it. 

And you do have a point. Especially when you consider that this richest 10% get 30% of all the income (ie households original income, before taxing account of tax and welfare benefits).

But then again, these rich households contain the very people we're going to need to drag Britain out of the mire. The contain the entrepreneurs, the high skill professionals, and yes, the bankers, on whom we will depend to create the wealth of the future. Which means we need to be very careful before whacking them with yet higher taxes.

Unfortunately, as you may know, yesterday saw the introduction of the new 50p tax rate for everyone getting over £150 grand pa. It also saw the abolition of the tax-free persconal allowance for anyone getting more than £100 grand (the allowance is progressively clawed back as income rises above £100k, imposing an effective 61% tax band between £100k and £113k). 

It's certainly not the way to get the economy moving again. But the really stupid thing is that it's most unlikely to raise any additional tax revenue (see this blog). Indeed, by encouraging high earners to rearrange their affairs in order to avoid the tax, it could easily reduce revenue. 

Just as a reminder, when Thatcher's government cut the top rate of income tax, it substantially increased payments from top taxpayers. In 1979, the top rate was cut from Labour's lunatic 83% down to a somewhat saner 60%, and then in 1988 it was cut again to 40%. And the share of income tax paid by the top 1% of taxpayers virtually doubled, from 11% in 1978-79 up to 21% by the 1990s. 

For future reference here are the figures (including the proportion of tax paid by the top 10%):

To summarise, history tells us that cutting top income tax rates increases the amount of tax paid by the rich.

HMRC estimates that nearly three-quarters of all income tax last year was paid by the richest 25%. We have now put that in serious jeopardy.

So why hasn't multi-millionaire Dave Cam pledged to reverse Labour's top tax increases?

Don't be daft - you know why.

We'll just have to hope that really he does understands the damage it will do, and somehow finds the courage to reverse it as soon as he gets his feet under the desk.

TUESDAY, APRIL 06, 2010

Super Campaign Show Darling

A new record low coming up?

Is it me, or does this election already feel like a sham?

We've certainly got wall-to-wall TV coverage, but most of it is as witteringly pointless as the BBC's Campaign Show - yet more showbiz for ugly people. Indeed, on Day One of the campaign, listeners to R5 Live are already complaining that the whole thing is terminally boring and they won't be able to stand an entire month of it. Even I'm bored, and I'm actually interested in this stuff.

And yet the 2010 election ought to be gripping, because as we all know, we're facing a crisis of historic proportions. 

Or do we? Do we all know that?

Because as we've noted before, as long as you haven't lost your job, and you're not dependent on savings income, your day to day life probably doesn't seem too bad. Yes, Brown is awful, but you don't have to listen to him. And Cam... well, muchnicer obviously, but is he actually up to the job?

And does it matter anyway? Most people seem to think what will be will be, and if the nation runs out of money, that's going to happen whoever's in power.

Clearly, I think it matters. I think we need to get rid of this lot so we can start shrinking the state back down to size. But in truth, even I'm not that confident there'll be that much shrinking under Cam.

What's missing here is any real sense of crisis. Back in the '79 election we'd had 5 years of crisis, and the bulk of the electorate knew the underlying issues had to be gripped. But right now, for most voters, the debt crisis just hasn't bitten.

And with Cam having sensibly decided to abandon his new age of austerity, the crisis has become little more than another load of old stuff. Stuff to be wittered about on campaign shows, but disconnected from most of the world beyond Westminster.

It will change of course. One day before too much longer, the debt market will go bang. And then interest rates will soar and everyone will discover it was a real crisis after all. 

By then, the election will be behind us. We'll have a new government. Or maybe the same government. Or maybe a shaky coalition. But whoever it is, they'll be forced to make spending cuts and increase taxes on a scale never even mentionedduring this campaign. And we'll all be wondering why we ever elected such a bunch of imbeciles in the first place.

And my solution to this mess?

Sadly, I don't have one.

MONDAY, APRIL 05, 2010

Avoiding A Brown Recovery

Posterwise, the Tories are back in the groove. Good.

Even better, George is ruling out further tax rises*. Hurrah!

But when (please God) they hoof out Brown and this bunch of bankrupt has-beens, they will actually have to deliver on their promises. And that means reversing both growth destroying tax rises and interest rate increasing debt mountains. In other words, it means substantial spending cuts.

Which is why Cam and George need to be very careful about adding to the difficulties already caused by ring-fencing the NHS and overseas aid. Sprinkling around spending goodies like today's £200m for new cancer drugs may deliver a short-term high, but it will make life even more difficult post-May.

We can see just how difficult by taking another look at the history of cuts over the last half century. The following chart shows year-on-year percentage changes in total public spending, adjusted for inflation (TME - Total Managed Expenditure). And as we can see cuts are very rare indeed:

A few key points to highlight:

1. Life on Mars - the biggest cut by far was that achieved under the IMF cosh in 1977-78; it was driven by cuts in both current and capital spending; but note that even that legendary cut only amounted to 4% in real terms, and it was reversed within two years.
2. Ashes to Ashes - the two smaller cuts under Lawson in the late 80s reflected a recovering economy trimming welfare spending; but a key driver was years of severe restraint in current spending programmes, combined with further deep cuts in capital spending.
3. Things can only get worse - in the mid-90s, Clarke managed to cut spending two years on the trot (the second helpfully delivered to his successor in 1997-98); a rapidly recovering economy helped, but once again, a key driver was capital spending, which fell by 35% in two years.
4. Dust to dust - Labour's planned cuts (in red) are a bad joke: as we've blogged before, they amount to an actual increase in total spending over the next 4 years.

This record puts George's task into its full horrific context. Because depending on whose estimates of the structural fiscal deficit you believe, he needs to cut spending by between 10% and 20% in real terms - and also, keep it down afterwards. Which is way outside the range of anything that any living Chancellor has ever achieved.

And this time, capital spending is so much less to begin with. Back in the 70s public sector capital spending actually exceeded public borrowing - even when the latter ballooned. Which offered a fairly easy cuts target. However, in today's post privatisation world, public sector capital spending is much less than our huge deficit, so no easy option there.

But then, what do you expect? This is precisely the kind of disaster you get left with when you elect a clothead high-spending clownfest like the present crew:

They've spent so wildly that even a 20% spending cut from next year's planned level would still only get us back to the level of spending in 2004-05. 

*Terms and conditions doubtless apply to George's tax offer - but the main thing is that George says there will be “no further tax increases in the emergency budget... We’ve set out our plans, they don’t involve an increase in VAT.”