Change isn't in the air

I’m indebted to an article written by Danielle Richardson

“It goes without saying by now that some form of tax raid is likely this autumn. Rumours of a new wealth tax abound, but the truth is that wealth is already being taxed, and government efforts over the past few years to squeeze the rich are backfiring.

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Anyone familiar with the Laffer Curve will recognise the issue of higher tax leading to reduced tax take – and it’s already happening with capital gains, where receipts fell by 18pc when the tax-free allowance was halved to £6,000. Put simply, if you threaten to gouge people’s profits, rather than pay up, they simply won’t sell.” ( What a surprise I’d never have guessed)

“The same principle applies to the removal of the non-dom status. Instead of billionaires sitting tight and handing over more money, they’re leaving. As Tom Haynes reported earlier this week, non-doms are fuelling a £700m London property sell-off.”

Other people are joining the chorus about just how dire our position is. As an economist it is fascinating to see theories decades old playing out in real time yet again. There is a reason that any government attempting to direct the economy from its own, centrist position always goes bust. Apart from anything, urgently needed reforms just don’t happen. Sounds familiar?

Currently our budget deficit stands at  5.7%  and national debt at 94% of GDP. In case anyone has forgotten “deficit” is the difference between what the Government takes inand  what it spends. Without serious and sustained surgery by 2070 (which sounds a long way away but its only half as long as to the end of WW2), the deficit will be more than 20% and the national debt at 270% of GDP. It will – trust me I’m an economist  - blow up and usher in a period of proper, horrific REAL austerity.

There’s a wonderful parallel. In the 1980’s Sweden was going through the same cycles that we are currently. Massive burgeoning State spending led to it becoming 57% of GDP – we are already nearly 50%.

All the things we are currently seeing in UK happened – inflation not under control, unemployment rising because it was better to NOT work and high net worth individuals leaving. It actually got worse. In the 1990s, State spending in Sweden ended up at 70% of GDP. That means that the State was spending 70% of what the country produced. The budget deficit was 13% of GDP. There was literally nothing in the tank, and when a banking crisis struck (as you know things always come along in threes), “something” had to be done.

Sweden responded in exactly the right economic way. Unemployment insurance was cut back, disability benefits were tightened. The pension system was completely rejigged.  It slashed public expenditure by 20% and social spending to below 27% of GDP. All this not only reduced the deficit but actually got the national accounts into surplus. Compare and contrast with my friend Millei in Argentina. It’s the same medicine for the same illness. Halleluiah!

The current problem in the UK of course is that we currently have a government that has no idea how anything works economically and therefore the current trajectory will continue as long as it exists ( which may not be that long, incidentally)

The narrative of proper austerity would have to be sold. In one of my recent articles I postulated that simply NOT increasing benefits by inflation over not very many years would solve the problem (and it would). We need a respected finance minister (and goodness knows who that might be) to tell us that fiscal responsibility is a must. Sources on both right and left would have to hammer the message home. You will never get everyone to agree but at least we might get a majority onside. Apart from anything else increasing deficits and debt take more and more away from future generations and make a breakdown increasingly likely. We need an Office of Budget Responsibility that gets its statistics right and is demonstrably right in what it says and not merely echoing existing policy.

The problem in the UK is our economic model is entirely different in terms of how things get done. Quite part from the civil rights and ecological pressure groups, we have a serious divide between right and left. Sweden, partly because of its history and social democratic model, has much less fracture between the sides. In reality, what would happen here would be that even if a consensus could be reached, some ghastly ,miniscule group would challenge the decision through the courts, with inevitable delay and unutterable potential disaster.

Let me finish with just one thing. Rachel Reeves is desperate to force funds of all sorts to invest more in UK companies, despite the fact that the current set up both inhibits and dis-incentivises such a thing. Some of the institutions have said they won’t, but there is actually one perfectly good reason why only 22% of UK investors invest in UK companies. It’s because there is effectively no properly tax efficient way to do this in proper volume (£20 odd thousand a year? Total peanuts)

Compare and contrast with the good old U S of A. They have a variety and range of different ways to invest. The free market (better known as economics) takes care of it all. 65% of Americans invest in American companies. That’s three times the UK number. The savings rate means there is money to do stuff and it is easy to get it done. It’s also why America does well. Try and fail no problem, do it again, here’s some more cash. Fail here and you are anathema. That alone is the reason America has tripled in size relative to the UK over the last few years. Dear Chancellor, pay attention. 

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