Sunday, November 22, 2009

Going For Growth

Time to get serious

When it comes to the economic growth, the fundamental difference between socialists and free marketeers is that socialists believe you can buy growth with taxpayers' money.

So today we heard Gordo's Chief Secretary to the Treasury - the person whose very job is to rein in public spending - once again telling us that cutting public spending to tackle the fiscal deficit would undermine the prospects for growth.

Why's that wrong?

At the risk of boring you, let's just remind ourselves.

It's wrong because public spending droppeth not as the gentle rain from heaven: by an unfortunate freak of nature, it all has to be paid for. And the payment can only come from one place - whether it's taxes today or taxes tomorrow, taxpayers end up paying.

And what taxpayers have to pay in tax, they cannot spend on other things. And when workers have to pay more tax on the fruits of their labours, they labour rather less, producing fewer of those other things in the first place. And when investors have to pay more tax on their profits, they invest rather less. And when taxpayers have to pay too much tax, they up sticks and leave altogether.

Now, this might not matter too much if our current fiscal deficit was simply the result of a short-term cyclical downturn. But it isn't. It's primarily the result of this clothead government spending far too much money through the good times (the OECD says that of their forecast 14% UK government deficit next year, around three-quarters is structural, not cyclical).

Government borrowing?

Well, yes, in the short-term, sure. Why not.

But in the longer term (ie the other side of the next election), our creditors have made clear they expect to see some serious belt-tightening. They are simply not prepared to go on financing one pound in every four HMG spends, as is. Unless HMG mends its ways pronto, we will find ourselves facing penal interest rates, a international investors' strike, and a collapse of the currency. None of which would be awfully good GDPwise.

Which leaves just two options.

The first is inflation: the classic cop-out for a bankrupt government, and almost certainly Labour's unspoken gameplan - just like it was back in the 70s.

Unfortunately, inflation is most unlikely to stimulate GDP growth. It impoverishes savers, cranks up uncertainty, almost always gets out of hand, and has all kinds of other nasty effects beloved of economic theorists but far too tedious to set out here.

So if inflation is out, we're left with just one coherent long-term plan - cut public spending, as recommended so many many times before.

Which is why Cam's interview with Marr this am was moderately encouraging.

He told us there'd be a Tory budget within 50 days of an election victory - good - and unlike the plain Age of Austerity message he and George delivered at last month's Tory Conference, this morning he emphasised that his budget would "go for growth".

As many people noted at the time, growth was the vital ingredient missing last month. And cutting spending against the background of a growing economy is going to be a whole heap easier than cutting in the teeth of an ongoing recession.

So how do we actually go for growth?

All together now - CUT TAXES. Especially those on enterprise and employment.

And no, it won't be easy: with a fiscal deficit around 14% of GDP, there is no money for anything. But cutting taxes really is the only known way in which government's can stimulate sustainable long-term growth (see many previous blogs).

PS Just so we know, cutting Corporation Tax by one percentage point would cost £1bn next year.

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