The Economy: How to fix it?
August, 25, 2008
My husband, harrumphing from his armchair, seems to know how to fix the broken UK economy. So do his friends, a guy we met in the pub as well as most London taxi drivers. If that’s the case why can’t the Government do it then?
Presumably, because it’s not that easy – and here’s the quick SaveBorrowSpend guide to the big problems and sticky solutions to what’s happening with the economy. And, for a change, it’s grim.
Global Problems
Gordon Brown is keen to persuade us that the global economy is like a storm over which he has no control – all he can do it safely navigate the little ship that is the UK economy through it. Funny that he never ‘blamed’ the global economy for the ten years of growth he presided over as Chancellor. This argument lets politicians and banks off the hook – “not our fault” they say “it’s the global economy, innit?” Critics would point out that if economies are no more controllable than the weather then the least you could do is save up and buy an umbrella, which the UK Government didn’t do when the sun was shining.
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Tax
Some (mainly right-of-centre) commentators insist that tax cuts stimulate ailing economies. However Gordon Brown, it’s fair to say, is a big believer in The State. That means tax revenue to re-distribute (I know, the 10p tax band thing was a bit of a mistake, wasn’t it?). Expect to see some tinkering with elements of tax policy (see below) but the basic model of personal income tax will remain. Cuts in public spending would be inevitable if taxes were cut, and that’s a critical issue in UK politics (which is why the Tories have taken a bit of a rain check in explaining how they’d get us out of this mess – the answer is to reduce public spending and waste... are they up to admitting it?).
Stamp Duty
At SaveBorrowSpend we are all for completely scrapping stamp duty, especially for First Time Buyers. The Government has picked up the vibes about how loathed this regressive tax is and saw an easy hit: help the housing market (so critical to the UK economy) and be seen to help middle England. Except they didn’t see the obvious – float the idea of a stamp duty holiday and watch sales collapse as people put off buying for a few months and potentially save twenty-grand or so. Doh! Any reform is unlikely to scrap the tax, just adjust it a bit to help people in key New Labour marginals (cynical – moi?).
Windfall Taxes
Another measure guaranteed to cheer up the Labour faithful is to tax those top-hat wearing, cigar smoking fat cat businessmen in the energy industry. Any tax would have to be seen to be benefitting voters as opposed to disappearing into the Government’s tax piggy bank, thus the rumoured one-off energy payment allowance (see below). The problem with windfall taxes is that they antagonise big businesses (who then relocate overseas) and government has a habit of finding another spending gap to put the money into (which doesn’t translate to you and I feeling any better about it).
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Gimmicks
The Government has allegedly planned to give every family in receipt of Child Benefit (i.e. not means-tested) a one off energy relief payment of about £150 this year. £150 is, to many people, a lot of money so I don’t call it a gimmick lightly. But where is it fair to give a company director on 1.5 million a year a bonus just because he has kids, when a childless couple living down the road on a low income don’t get it? The official answer would be tax credits (i.e. give the government your money through tax, fill out a form and they’ll consider giving a bit back). If in the middle of this global storm the best they can do is a one-off bribe then we are all definitely in trouble.
Interest Rates
This is the biggie. No doubt the government is desperate for the Bank of England to lower rates. Low taxes and low interest rates are both seen as a good way of resurrecting dead economies (and we are already in or just about to go into recession). Unfortunately, the Bank has a dilemma... inflation. The credit crunch and rising energy costs have seen price rises for almost everything we need or like to buy. These inflationary pressures are bad – so they need to correct themselves before they cut rates. It’s a genuine Catch 22. And there’s nothing the Government can do about it, giving the Bank independence ten years ago.
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It’s Politics
The Government is trapped in a game of economic Snakes and Ladders which they claim isn’t of their own making. The Labour Party, if political commentators are to be believed, is expecting to lose the next election. Their job is damage limitation so that they are in good shape for opposition and this means holding onto as many southern marginals as possible. Of course, at the same time they have to balance this with their traditional supporters in the Northern Heartlands who have benefitted from massive government investment and public spending. And the radical solutions (tax cuts and reduced public spending) are either too risky or politically unacceptable to a left-of-centre tax-and-spend party like New Labour. To be fair, these solutions are probably too risky for the Cameron Tories too (who have committed themselves to New Labour public spending plans for the short term). The medicine will taste nasty, and the people in charge don’t even want to open the bottle...
SaveBorrowSpend Philippa Adam
