How’s the coalition government doing? You probably think things are going OK. We aren’t in Europe. We aren’t having a chaotic debt-driven meltdown. Nick Clegg and David Cameron seem to be getting along pretty well. And the Tories are slowly getting a grip on public spending.
But there’s a problem with this. You see, the Tories aren’t getting a grip on public spending. They talk about it a lot, as does the media, but the truth is that little is happening. The last decade has seen a 50% plus rise in real government spending in Britain, which has pushed the size of the state from 36% to 49% of GDP.
But no party has a plan to do much about it. Instead the coalition hope to keep spending roughly where it is. Their idea isn’t to make the debt problem go away by cutting spending, but to hope they can banish it with new and rising taxes and by increasing revenues from existing taxes (as GDP grows). So far there seems to be a party consensus that what analysts from Tullett Prebon call ‘the Brown Binge’ gets to stay.
This isn’t a good strategy. As Tullett Prebon points out, it reflects “an unwillingness to look reality in the face, and an abject failure to ask tough questions about the affordability of public spending, about the real outlook for growth, and about the burden being borne by hard-pressed taxpayers”. Ordinary people are living in a pretty grim world. Nominal wage growth is nonexistent and what income people do have is being eroded by inflation and tax. Average real take-home pay is now £68 lower than it was two years ago. Employment is plummeting (it fell by nearly 200,000 in the three months to September). Due to the fact that so much of it has been based on government spending and debt, it’s increasingly clear that the vast majority of our economy is incapable of growing. We are stuck in a downturn that isn’t going to go away with a few minor policy adjustments. Instead, if we want to transfer resources from the ex-growth part of the economy (the government in particular) to the part that might grow, we need something more radical.
What might that be? Tullett Prebon, never one for mincing its words, has an idea. “Nothing less than truly drastic tax cuts, funded by further reductions in public spending and amounting to perhaps £50bn”, with the emphasis on redistributing towards smaller firms and working people on low and medium incomes – “the principal victims of political denial over the true state of the economy”. That means huge cuts to VAT, income tax and national insurance for those earning £37,000 or less and the elimination of the tax burden on small to medium enterprises.
I have sympathy with Tullett Prebon’s view, but this is clearly a big subject. I’m going to write more on it on the MoneyWeek blog and hope that you will join me to debate it there and on Twitter (@Merrynsw).