Thursday, November 23, 2006

Those Were The Days...

Sharing the proceeds of recession

Excellent Telegraph letter from Corin Taylor, the Head of Research at the TaxPayers' Alliance, which concludes:

"Mr Osborne correctly argues that Gordon Brown's tax rises have damaged the economy and hit families hard, but, worryingly, he said at the launch of the Tax Reform Commission Report that any tax changes will be "revenue-neutral". In other words, every tax cut will be met by an equal and opposite tax rise.

Britain seems to have moved towards a high-tax, high-spending state with little debate. Mr Brown should not be allowed to win that easily."

Absolutely right. And Corin makes an interesting point about the Thatcher tax increase to balance the fiscal books in 1981, which have been touted by George as showing that he's just following in the footsteps of St Mag:

"The reality is that Tory tax rises in 1981 made the economic pain of reducing inflation, which was really achieved via monetary policy, that much worse."

He may well be right about that too.

Warning: tedious economic reminiscense follows.

Speaking as one who was literally there at the time, the public finances were in a awesomely shocking state. Public sector net debt was 46% of GDP and rising, with borrowing heading back up through 5% (see table C25 here). To be sure, there was a clear understanding that monetary policy was the key to controlling inflation, but market-based techniques of monetary management were all having to be relearned after forty years of corsets and other extremely questionable regulatory undergarments.

And one theory said that it was the fiscal deficit itself that was making the whole exercise virtually impossible because it necessitated such massive gilts issuance to prevent it being monetised. Interest rates were pushed through the roof, dragging the Pound with them, and blowing away British industry in the process.

With what we now know, maybe things would have been done differently, and maybe Thatcher wouldn't have whacked us with the tax hike. Certainly the famous 364 economists who signed that notorious Times letter said more or less that at the time.

But as David Smith points out here, the 1981 Budget also cut interest rates by 2%, allowing the Pound to fall. It ushered in a more flexible implementation of monetary policy, away from the strict targeting that had caused such problems, and more akin to the Bank's current approach.

That was the future once.

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