Brace yourself we have another helping of doom and gloom from Dr Tim Morgan, the author of the recent Project Armageddon report.
It’s the first part of his Reform Trilogy, titled Challenging the denial consensus: a radical alternative based on tax cuts. In the report, Tullett Prebon’s Global Head of Research poses some radical questions about public spending and taxation, and reaches some equally radical conclusions.
The Doctor’s thesis is that working people can no longer shoulder the tax burden which excessive public spending creates and nothing less than truly drastic tax cuts, funded by further reductions in public spending (around £50bn), can realign the economy enough to deliver a return to growth.
Over the past decade, two factors have put the British economy into an ex-growth stranglehold. First, individuals and government alike have borrowed to the hilt, with the recycling of asset-driven private borrowing masquerading as growth. Quite apart from creating massive personal indebtedness, this has elevated the economic prominence of debt-driven sectors to the detriment of industries which can generate genuine organic growth. Second, and expressed at constant values, public spending soared from £451bn in 1999-2000 to £688bn in 2010-11. The public are being asked to believe that this spending increase is irreversible, and that a debt-shackled economy, about 70% of which is ex-growth, can afford to let its government carry on spending at this level. This is totally delusional.
Working people are now bearing the brunt of this abdication of leadership. Nominal wage growth is minimal, and incomes are being eroded by inflation which is high even in general terms, and very much worse where essentials (such as fuel and utilities) are concerned. The outlook for ordinary people is grim, and they are entitled to ask whether they can be helped by reductions in the burden of taxes and charges. So, too, are small and medium enterprises (SMEs), which are the only potential sources of jobs, of growth and of higher standards of living.
So what’s the answer? Morgan says the £50bn of tax cuts referred to above should be targeted at working people on low and medium incomes.
There are solid economic as well as social reasons for slanting redistribution in this way. Economically, there is an imperative need to boost private consumption, and this can best be accomplished not by handing money back to the better off, but by raising basic tax thresholds and by cutting the rate of VAT. We also advocate realigning the taxation of small and medium enterprises (SMEs) with the express intention of promoting job creation (and it is high time that policymakers recognised that the concept of a “jobless recovery” is a contradiction in terms).
Socially, working individuals and families on low and medium incomes are the principal victims of political denial over the true state of the economy. The debt burden, whose creation largely resulted from regulatory negligence, is huge. Real living standards are subject to an ongoing process of severe decline as the purchasing power of stagnant wages is eroded by rapid rises in prices in general, accompanied by an even greater escalation in the cost of essentials. The state of the economy and the national finances is such, that policies of minor adjustment are incapable of stopping the rot.
What is required is the radical alternative of cutting back the state, and handing resources instead to ordinary working people.
In practice, that means income tax and National Insurance (NI) for those earning less than £37,000 being cut, VAT being lower and eliminating part of the tax burden on SMEs.
He reckons this will be more effective than the Bank of England printing a load more money.
The injection of close to £600bn of borrowed and printed money has not delivered a recovery. Traditional monetary and fiscal policy levers have ceased to function. Yet the political class seems to have nothing to offer other than a pious, Micawberish assumption that “something [economic recovery] will turn up”. It won’t; and the reality is that the economic downturn is proving more protracted even than the Great Depression of the 1930s. This cannot change unless policy alters radically.
And if you don’t agree with anything else in this report, that critique of QE seems to be spot on. Shame the Bank seems to be softening up for another splurge of it then… Time for a bit of a rethink?
Related link:
Top broker in fierce attack on Osborne recovery plan – Evening Standard