Cutting taxes, regulations and Britain’s decarbonisation will cause plenty of pain and very little gain.
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Many people may agree with City AM Editor Allister Heath’s assessment yesterday that “the failure of our part-time chancellor has been as spectacular as it has been self-inflicted”.
But they should be concerned that, according to the Express’ Patrick O’Flynn, most Tory MPs in the Commons were talking about the rest of his article.
Heath’s remedy would create nothing short of economic collapse.
It is based on three tenets of libertarian economic dogma that have each been shown to fail:
• Further spending cuts paid for with tax cuts for business and top rate tax payers;
• Further labour market deregulation including exempting the smallest firms from “most regulations”;
•The suspension of the Climate Change Act.
Britain’s double dip recession should be proof, if ever it were ever needed, that ‘expansionary fiscal contraction’ does not work.
The rapid pace of spending cuts has been a contributing factor to Britain’s economic decline and increased borrowing.
The most recent public finance figures showed that Britain borrowed £17.9 billion in May 2012, compared with £15.2 billion at the same time last year. The rise was driven by a 7.3 per cent fall in income tax receipts and an 11.7 per cent jump in welfare benefits.
A temporary tax cut, to VAT as the IMF suggests, or to employee’s national insurance contributions to put cash back into consumers’ pockets would certainly boost the economy but it makes very little sense to target businesses when they are currently hoarding cash.
But the Office for Budget Responsibility’s own analysis shows that boosting infrastructure spending or welfare measures such as job guarantees for the long-term unemployed are the best way to boost growth from government spending.
Neither does cutting employment rights make much sense. Only Canada and the US have lower labour market regulation than the UK.
See also:
• IMF downgrades growth forecast AGAIN as Balls warns of “heavy long term price” of failure 16 Jul 2012
• OBR figures show a long term fiscal challenge that needs long term solutions 13 July 2012
• There is a clash of priorities in the government’s austerity economics 22 Jun 2012
• It is time to debate a new economy 17 Jun 2012
Yet the UK and US had the worst unemployment record following the financial crisis. Germany, which has added jobs over the same period, comes 28th out of 40 in terms of least stringent employment protections.
Heath’s final proposal mirrors a set of ‘policies for growth’ in a recent letter from right-wing think tank bosses to the Telegraph and is at odds with the views of business groups. Both the CBI and EEF argue that the dichotomy between ‘green’ and ‘growth’ is a false one.
Indeed, with clean energy investments growing by 600 per cent since 2004, the economy contributed a third of the 0.6 per cent growth seen in the fiscal year 2010-11. According to recent reports, both onshore and offshore wind are likely to be cheaper sources of energy than nuclear.
George Osborne certainly does need “a blitz of autumnal activity” and a “drastic u-turn” as called for by Heath. But this should include further measures to use the low cost of government debt to boost infrastructure spending and policies to get work for the 885,000 people who’ve been unemployed for more than a year.
Cutting taxes, regulations and Britain’s decarbonisation will cause plenty of pain and very little gain.
58 Responses to “UK economy will hit the rocks if Osborne follows Allister Heath’s plan”
barsacq
If Allister Heath wants to give lectires, he can fuck off back to his own country and give them there. Too many know-it-all foreigners who believe they have a right to hand out lessons in the press today.
Rob Whitehead
Yes, but those on the left need to be better sighted on the benefits that targetted tax cuts might bring. Cutting payroll taxes (as per Obama’s JOBS Act) should directly lead to an uptick in employment and be a genuine boost to economy. Currently employers have to pay 13% NICs on top of every employee salary here – very directly discouraging bosses from hiring, and is so doing serving as a brake on innovation and investment. A time limited suspension of employer NICs (say 5 years to make it meaningful and risk free for employers, and perhaps only applied to SMEs) is something the left could, and should, embrace.
JC
And what dogma would you propose? If there’s nothing worth investing in, wouldn’t it be a good idea to change things? Or would you prefer to force investment when most see little chance of any return?
Companies are sitting on their cash because they don’t see any value in investing it elsewhere. Maybe we should consider the concept that the government is encroaching too much into the wealth creators and shrink it slightly. Maybe the government does take too much tax from the people and should reduce it a little. Maybe, in our efforts to go green we’ve made things too expensive and should retrench a little. Maybe we should reduce the taxes and burden on employing people to encourage more employment.
Or should we just up the taxes to employ more people in the public sector, make it more difficult for small companies to grow and just borrow more?
Anthony
@JC – you seriously don’t sound convinced by those arguments. Have you ever worked in private enterprise before? If businesses need people they need people, if they need people they’re expanding and the “tax burden on employing people” has hardly got the country’s MDs pulling their hair out in meetings about whether they can grow or not because of the 13% NICs it would take to hire a new member of staff . Cutting taxes on business endlessly to compensate them for making less money is a massive ugly dead end in the long run – businesses hate this idea.
Also “in our efforts to go green we’ve made things too expensive” – where the hell are you living? As if this government has dared to put a penny on the price of anything in the name of the planet. Embarassing!
And also “encroaching too much on wealth creators” – when the hell have “wealth creators” ever had more freedom? If anything It’s up to the “wealth creators” to actually go out and “create wealth” as this is their job by definition no? What’s a “wealth creator” for if it doesn’t “Create wealth”? You’re telling me someone would rather sit and hoard cash then use it for productive enterprise because of 5% marginal tax rates? Business people are more passionate about business than that.
What’s a “Wealth creator”?
Anonymous
Last year the right was highlighting the deficit to justify public sector cuts, this year it is demanding cuts in REVENUE, the last thing anyone really concerned about the deficit would advocate.
It gives the lie to the deficit as being important to the right, except as a means to justify policies they didn’t dare openly express to the electorate.
What we need is to tax idle capital, tax hoards of wealth and redistribute to the people and bodies that will spend it. That will increase revenues, decrease wasted capital hanging like a threat over us and give people work and income again.
We need to recycle social wealth more efficiently and the best way to do that is by progressive taxation that increases taxes on wealth and the richest, targeted public investment that improves infrastructure and meets social need and a drive to increase incomes and benefits and cut costs for the bottom half.
Cutting taxes on employers will do nothing to increase employment. There is a crisis of demand, not supply.