The Economy
This is not just the key issue of the General Election. It is the key issue affecting most voter’s lives. It is time to have a look at the problems. This blog offers a different perspective to most mainstream economic commentary.
In the narrow sense the problem is that there is too little economic activity to generate the tax revenue the Government needs to meet its expenditure. The argument is that if it cuts spending to the level of income, it will trigger a worse economic downturn. This is true but not as absolute as its advocates proclaim. Nevertheless majority opinion supported the bold fiscal stimuli, started by Brown and Darling in the U.K. and copied world wide. This is acknowledged to have stopped the recession becoming a depression. Now all the discussion is about the huge levels of Government borrowing, because if you maintain or increase expenditure without the income or savings to pay for it, you have to borrow. So we have borrowed. Bigger than ever before.
There will have to be cuts. Unfortunately we are in the middle of a General Election campaign (the election should have been held by now, the Queen should not have opened a new session of parliament last November, it was against the national interest) and no party is willing to come clean with a clear menu of, if given the chance, of how much it would cut, where and by when. They all fear electoral failure if voters find their own lifestyle will be dumbed as a consequence. This is not a good situation for the country to be in, especially if no party has a majority after polling day. The problems are much more deep seated than we dare to acknowledge and this blog will now bring them into the open.
I have previously highlighted the structural problem of our economic model sucking money from the poorest and distributing it to the richest. I have also said we must make more of what we consume, earn more of what we spend and save more of what we earn. The size of Government must be cut, because it consumes far too much, and the resources and people must be redeployed in wealth and job creating economic activity. By wealth I mean real, new creations, not asset inflation or electronic money. I have said that stability of financial institutions must be restored by returning to a yield based valuation of assets, rather than the on the day market value, which has come to common use today. Long term savings and pension funds must offer guarantees and security to savers, rather than as at present, transfer the risk to their customers to bear. I have also promoted a much simpler and fairer income tax system,which at the same time provides Government with a universally flexible and adjustable tool of fiscal management. (See my book 2010 A Blueprint For Change Part 1 Chaps 6-8). I have urged that money borrowed by government must be invested in the country’s infrastructure creating new employment an an enhanced national asset base. It must not be spent on excess government which drains wealth and leaves the nation creaking and impoverished.
That is quite a list. There is, however, an underlying problem which must be addressed before any lasting and effective solution to our economic condition can be secured. It is this. From 1945 until 1979 we had operated with an economy which carried a very heavy tax burden designed to deliver the comprehensive level of public services enshrined in the Welfare State. The tax burden became excessive. The Welfare State became inefficient. The Economy became uncompetitive. The response was to cut taxes significantly, leave services more or less in place but seek to efficiencies. Like all public policy, some bits worked better than others. What was lasting and to a certain level, corrosive, was a culture change. The public expects better and better public services and lower and lower taxes. There is never any proper attempt to analyse and present an easy reference between tax levels and service levels. Thus the public now look at each separately and demand opposing standards which cannot be fulfilled. Politicians shy away in ambiguity, knowing that the specifics will cost votes. The outcome is a fudge which cannot work. Labour talks of better services to its core voters, but for other votes has to keep a lid on taxes. The Conservatives soothe their bedrock with the notion of tax cuts and efficiency, but have to offer improvements in services to stand any chance of getting elected. Thus neither is able to deliver to the level of promises, both fail to save enough when in government and end up borrowing too much.
To sort this out we have to relate the quality and volume of service (and of government) to what people are willing to pay in tax without becoming disincentivised. It may be the culture is for less tax but more insurance. Health insurance, unemployment insurance, sickness insurance, for instance. It may be people are happy to pay more tax for better schools, cleaner hospitals, free care for the elderly, shorter waiting times and better equipped troops. This balance has to be struck, not just on paper, but in the public psyche. At the moment the public is largely in ignorance, while the politicians are largely in denial. With borrowing at levels which are unsustainable, some may say out of control, with a potential interest and repayment burden which could become unbearable, this will have to sorted very soon.
We need political concensus and strong government. Let us hope we get it.