My calculations indicate that the price for Labour’s mess may be a £3,000 increase in the aggregate tax burden per household each year in the event of a downturn. I would be interested to know whether Centre Right readers agree with my conclusions and how great increases in tax might be avoided.
The chart below shows that public spending under this Labour Government is around 38% of GDP. Looking at past downturns, we can guess how much public spending will have to go up if a downturn follows the current financial crisis. Generally, we can see it is around 5% of GDP. So with public spending now at around 38% of GDP, we may expect public spending to rise to around 43% of GDP. The last time that happened was when Margaret Thatcher had to stabilise the country after being elected in 1979. It all looks ominously like a case of Groundhog Day 1970s style.
Given that, unlike the 1990s downturn, there is little slack in the public finances and that continued deficit spending is unlikely to be sustainable, the extra spending in the case of a downturn can be expected to be paid for through extra taxes. Margaret Thatcher had to raise taxes by around 5% of GDP and this could be a consequence we can expect from Labour’s economic mismanagement if there is a downturn.
What does this mean to you in practice? Well, GDP this year was forecast in Budget 2008 at 1,473 Bn – 5% of that figure is £74 Bn. There are some 25m households in the country – so the aggregate extra tax burden could amount to some £3,000 per household each year. This would be the hard cash consequence of not fixing the roof while the Sun was shining. And it would happen amidst the carnage of repossessions, job losses and general misery. Labour really would have done it again.
> Previous entries in this 'Labour's economic mismanagement' series: (I) Debt and (II) Taxes.
