John Baron MP: When it comes to the economy, the Government lacks the balls – and so does Balls
John Baron is the Member of Parliament for Basildon and Billericay. Before entering politics, John worked in the City advising mostly charities on their investments. He presently writes a column for the FT’s Investors’ Chronicle magazine.
With the dust now settling on the Budget, it is clear the Chancellor has chosen to stick with his economic plan. Whilst a number of individual measures were welcome, the Coalition has simply tinkered by moving a few £billion around in an economy of £1.5trillion. This will have the same effect as moving deckchairs around on the Titanic – or the band changing the music – and will prove woefully inadequate. What is needed is a substantial cut in spending, allied to substantial tax breaks to get the economy moving.
It is perhaps worth reflecting on yet another set of missed targets. The original plan was that we would have eliminated the annual deficit by 2015, and even begun to reduce the national debt. But we will still be adding to the debt pile in 2017/18. The Government boasts of reducing the deficit by a third – this still means we are adding to the debt, but at one-third less the rate previously.
A common refrain used against Labour when we first came to office was that they had doubled the national debt in their 13 years of power. According to figures from the Taxpayers’ Alliance, the present trajectory suggests that by 2017/18 the Coalition Government will have more than doubled again the official national debt it inherited in 2010. And this assumes the OBR’s optimistic growth forecasts remain intact – something that has yet to be achieved.
To a certain extent, one can sympathise with Treasury policymakers. This slowdown in the West is unusual: it is a deleveraging recession and not a destocking one. Traditionally, a good dose of Keynesian stimulus – using borrowed money if necessary – would have corrected the situation. This option is not available today. The hallmark of this recession is excessive debt – both governments and consumers have lived beyond their means. The cupboard is now bare, and the markets know it.
The Government has essentially three options open to it: default, growth or “financial repression”. Default is the least attractive. Given the extent of debt in the system, this would usher in Armageddon.
The second option, and the best long term solution, is economic growth. But the government refuses to grasp the nettle. It would require substantial spending cuts. The Taxpayers’ Alliance calculates that by 2017/18 over 30% of all government revenues will be earmarked to service past liabilities rather than pay for current services. This is economic madness.
Meanwhile, government spending priorities compound the error. By essentially ring-fencing Welfare and the NHS, and increasing spending on International Aid, around half of total government expenditure is protected. This amplifies the strain on remaining departments. For example, our Armed Forces are being cut to the bone and beyond, at a time when many countries not necessarily friendly to the West are increasing their military spending.
Yet the government fiddles, and rearranges the deckchairs. In the 1990s, Canada cut spending by £7 for every £1 raised in tax. Éire has done well to reduce its spending by 19% since the crisis. Other countries have done likewise. But the UK refuses to cut spending – thereby adding to the debt pile. The ship of state stands more chance of staying afloat in choppy waters if the weight of Government spending is reduced. There is money to be saved, but political will is required.
As a Nation, we need to rediscover our work ethic. For example, why should anyone on Jobseeker’s Allowance receive benefit when they have refused a suitable local job? Having visited various European capitals recently with the Foreign Affairs Committee, I was struck by the total lack of “foreign” workers in the restaurants, hotels, conference centres, etc. How this contrasts with over here. Despite my humble upbringing, a work ethic was instilled from early on. I applied myself and was lucky. Millions have done likewise. But there are also millions who have not.
This needs to change. Today, the third, fourth and fifth quintiles of the population are receiving more in benefits than they pay in taxes. According to the Centre for Policy Studies, 40% of non-retired households in 2011/12 were in this position. The figure was just 29% in 2000. This course is unsustainable. Labour damaged the economy, but this government is doing too little to put it right.
Real cuts in spending would give us more headroom to introduce substantial tax cuts to encourage growth, drive down unemployment and raise living standards for everyone. At present we are only tinkering. The 1% cut to corporation tax, welcome though it is, simply means we now have the 17th lowest rate in the world according to the Saїd Business School. Take into account reliefs and allowances, and Britain ranks 22nd out of 33 countries.
Large numbers of businesses have relocated to lower tax regimes including Éire. No management worth its salt is going to go to the upheaval of relocating their business to take advantage of the 17th lowest tax rate in the world. Deep tax cuts across a spectrum of areas to encourage business, especially small businesses, is what is required to help increase competitiveness and spur growth.
Other supply-side measures are needed, together with real cuts to regulation courtesy of the EU. But corporate tax cuts there must be. History is awash with examples of better economic growth and greater prosperity for all if such measures were implemented. But all we have is the orchestra playing on – with occasional changes to the sheet music – as the Titanic continues towards its rendezvous with the iceberg.
The Government’s plan is to steer towards the third option – that of “financial repression”. The objective is to create a little more inflation in order to eat away at the debt over time – a policy pursued after WW2 on both sides of the Atlantic. This is perceived as being the least painful and therefore the most politically astute. It is being achieved by keeping interest rates artificially low at both ends of the yield curve.
This is easy at the short end because central bankers are paid by government. It is achievable at the longer end by forcing the big players, the pension funds and banks, to be buyers of government bonds through regulations such as asset/liability matching and capital adequacy ratios – and yields reflect this artificial demand.
This is a dark art. Quantitative Easing is an essential ingredient. This will also help to drive down the Pound. It is all part of the script. Whether successful or not, interest rates will remain low for years – there is too much debt in the system, and default is to be avoided. Meanwhile, savers will be crucified – the view being they can afford it because they are the only ones with money.
This all bodes ill for the longer-term health of the economy and country – stock market investors and property speculators being some of the few beneficiaries in the short term. Successive Labour governments have simply not grasped that economic mishap is the consequence of ever greater spend and role by government. It is no coincidence that most Labour governments have ended in economic failure. Chancellor Balls would do no better – and probably worse – having influenced the last shambles.
The Government is right to say you cannot borrow your way out of debt. But it is wrong in refusing to face up to facts and cut spending. Instead, it has opted for austerity by a thousand cuts and inflation – the easier option. History suggests this is unwise – attractive though it may seem in the short term. Inflation, and its expectation, leads to loss of competitiveness, falling living standards and economic strife. The 1960s and 70s should have taught us that.
Instead, we need conviction politics and conviction economics. The Conservative Party will – somewhat unfairly – never be perceived as the nice party or the caring party. We get elected because we deliver economically – respect, not affection, being our passport. Policymakers had better wake up to this fact, otherwise this ship is going down by the stern.