...a blog by Richard Flowers

Thursday, June 25, 2015

Day 5288: Only Fools and Tories


"No Income Tax, No VAT;
"No Deficit, No Guarantee."

Master Gideon would appear to have taken Steve Bell's gimp-suit-wearing cartoon of himself as a role model, judging by his justifiably-mocked announcements that he will be trussing himself up in legislation to stop himself doing things that he shouldn't ought to do anyway.

First, during the election, he promised to pass a law to stop himself raising taxes; then, in his Mansion House speech, he said he'd make another law that he would run budget surpluses in "normal times".

The fact that these two laws pull in opposite directions only adds to the madness.

Fiscal Rectitude, Steve Bell style (c) Grauniad

Swearing off ANY rise in taxes – particularly for a whole five-year term, when you've NO IDEA what's coming even in the next few WEEKS with the Greek bailout/crash out saga – is just silly. In fact dangerously silly.

When the books don't balance, you've got THREE* ways to address yourself to the problem: ONE, cut spending; TWO, raise taxes; THREE, a mix of the two.

Master Gideon's first pledge robs him of TWO of the THREE ways out of this mess.

(Full disclosure of wiggle-room here: he could raise taxes other than the "big three" of Income Tax, VAT or National Insurance. But no other taxes raise anywhere NEAR the kind of money those three do, not even Corporation Tax and he's very keen to keep lowering THAT one as well. So this law will stop any SERIOUS closing of the deficit through tax.)

So he's making it very much harder to run a surplus… at the same time as saying it's the law to run a surplus.

Minister, is this entirely wise?

Running a budget surplus is, in and of itself, not a bad idea. In fact, it's one that good old Keynesian Economics says we SHOULD do when times are GOOD (which they're sort of not quite at the moment, but they might still be the best they are going to get in this cycle).

But the way to run a budget surplus… is to run a budget surplus.

The way to not raise taxes… is to not raise taxes.

Who is going to enforce these laws? What are the penalties if Master Gideon breaks them?

In the last parliament Master Gideon promised to eliminate the deficit. For various reasons – some of them his own fault, but mostly things that are entirely out of his control (or possibly ANYBODY'S control!) like the Eurozone or the cost of energy shooting up and then crashing down when the Saudis forced the price of oil to drop – this he totally failed to do. Well, HALF-failed to do, anyway.

Mr Frown repeatedly broke HIS own "golden" rules too. Nobody came to slap HIM on the wrist either. Unless you count the SPANKING handed out by the global economic meltdown.

It's bad enough the Home Office pumping out SECURITY THEATRE without the Treasury starting to perform ECONOMIC THEATRE!

But, what is worse, they are a DIRECT ATTACK on a hundred years of democratic accountability and constitutional settlement.

Oh yes.

Because they're not really FOR holding Master Gideon to account. These laws are REALLY a BOOBY TRAP for Hard Labour.

If a future government, say a Hard Labour Government, wants to run a budget deficit – which they might have entirely good reasons for doing – they first need to repeal these "financial responsibility" laws.

One of the written bits of our unwritten constitution is the Parliament Act that says the House of Lords will not vote down a Government's Finance Bill, so that if a Party (or Coalition!) in the Commons can pass a Budget, then the Lords won't block it. But these "responsibility" laws are NOT Finance Acts.

(There's also the – unwritten – Salisbury Convention that the Lords will not block things that are in a winning Party's manifesto, but can you see "We Will Repeal the Financial Responsibility Act" making to ANY manifesto of a Party that expects to come out alive?)

So you can expect to see Conservatory Lords shamelessly delaying and derailing a future Government's budget, ignoring the Parliament Act on Finance bills under the pretext that the Government is "breaking the 'responsibility' law"; you can look forward to Conservatory millionaires getting their highly-paid lawyers to demand judicial-review of the repeal to drag things out further.

You can see that these "responsibility" laws are ACTUALLY an excuse to play fast and loose with BANKRUPTING the COUNTRY!

In other words, these are laws for the most appalling Financial IRRESPONSIBILITY!


*OK, there IS actually ANOTHER way of cutting the deficit. But it's the one over which the government has very little control beyond crossing its fingers and WISHING.

If the economy is GROWING, then you will get more tax IN just because the economy is bigger. So long as the increase in tax is more than the increase in costs (i.e. so long as economic growth is more than inflation) then with no other changes next year the deficit will be smaller.

This is where Mr Ball's mantra of "the deficit falling as a share of national income" comes from; it's the "Hope that SOMEONE ELSE fixes the problem" approach from the Party of "Let's Spend Someone Else's Money" solutions.

To illustrate: the Bank of England currently estimates growth this year will be 2.5% and next year will be 2.6%.

Assuming that this translates straight into the tax take, that's worth about an extra £20 billion a year this year and next. ALSO inflation is currently next to nothing. (Good if you're shopping; not so good if you were hoping for a pay rise.) So tax coming in goes up and spending does not. Which means the deficit will be £20 billion LESS without Gideon having to do anything.

The Conservatories ACTUALLY want to cut the deficit about £30 billion each year – so £100bn last year goes down to £70bn this year, then £40bn, then £10bn and then into surpluses by the end of the Parliament. Honest, they really mean it this time! – which is why they need MASSIVE CUTS on top of the rest of the country providing growth.

It's more complicated than that because they are pledged (or even triple locked) into increasing money for pensions and the health service, so the cuts to other areas have to be EVEN bigger.

And it's even more complicated because cutting government spending (at least in some of the things government spends on) can slow down the needed growth, which cancels out your savings.

To an extent this is what happened at the start of the Coalition, when Gideon slapped up VAT and followed Alistair "Captain" Darling's plan and cancelled a load of capital investment.

This made it harder for the least well-off to buy "stuff" and at the same time took away a lot of jobs from people who might buy "stuff", and if "stuff" isn't being bought and sold – i.e. if there is less economic activity – then your GDP and hence tax receipts go down.

Slashing away at people's benefits – which is the Conservatories' preferred method of cutting spending – may well have a similar effect.

Which just makes it even more stupid to swear off raising tax!

(And tomorrow, we can talk a bit more about Mr Balloon and the Magic Money-go-Round!)


Richard Gadsden said...

There is another way to reduce national debt (not deficit directly, though it might work through reducing interest payments) - deliberately cause inflation.

Worked in the 1970s; a lot of the national debt was paid off in effect that way.

Richard Gadsden said...

Oh, and, the Financial Responsibility Act could be repealed by just putting a line into the Finance Bill. It would still be a Money Bill and the Lords would still have to leave it alone.

Even if they didn't, there's the doctrine of implicit repeal.

Millennium Dome said...

@RichardG (#1)

Inflation on it's own won't do it - it's possible to get STAGFLATION where prices go UP but GDP goes DOWN and then you are really... FLUFFED.

It was the discovery of North Sea oil and gas (or that it became economically viable because of the oil shock) that allowed UK growth to catch up with the inflation and THAT was what made the debt/GDP shrink.

(People call it "inflating away the debt" but that's I think a cock-eyed view of what happened.)

Also, note that inflation is functionally equivalent to spending cuts - you get less resources delivered by the Government either way. So it's a very long way from the "pain free alternative" that people with short memories seem to think it is.