Tuesday, 11 November 2008

Spending our way out of trouble

It’s curious how a major financial crisis has been the saving of Gordon Brown, regardless of his own role in precipitating it. A month or so ago, you’d have got something approaching even money that it would have been a toss up for who would be forming Her Majesty’s Loyal Opposition come the next General Election, the Lib Dems or the SNP. Now though Labour have coasted the Glenrothes by-election, and the latest opinion polls suggest that the electorate agree (as does much of the world) with Gordon’s recent assertion that this is ‘no time for a novice’. Certainly not for George Osborne, whose reputation will not recover easily from his schmoozing with that Russian oligarch.

Vince Cable on the other hand is looking very much the man. Every major step the Government has taken has been proposed beforehand by Vince, and the LibDems are appearing foolish only in that they preferred the hapless Nick Clegg as party leader. A week or so ago, he was the object of Labour sneers over his proposal to cut taxes but already it appears that the Government are now about to do just that, with cuts targeted at those most likely to spend the money when they get it.

So what is it that is actually happening? To me it appears like this:

  1. The banks run out of ready cash after years of reckless, unsustainable lending (this one at least seems inarguable).
  2. The Government bail out the banks, at massive cost, by borrowing the money to do so since it has none of its own.
  3. Since this solves nothing, the Government now give people money to spend, once again borrowing the money to do so since its already up to its ears in debt.

This they hope will bring us right back to where we started; property prices rising, the banks lending lots of money, people spending money they don’t really possess at all, but with one major difference. The Government has placed itself in the self same position as everyone else; owing lots of money with no reasonable prospect of repaying it. The last time this happened (with somewhat different historical causes) was when Harold 'you've never had it so good' Macmillan was occupying Number 10, and leaving the incoming Labour government to pick up the pieces.

The Government was of course already deep in debt, not least from its fondness for PFI schemes, which represent a 'buy now, pay later' approach to public finances popular in part because the consequent debt is conveniently hidden when it comes to the balance sheet.

Is cutting taxes the answer to our problems? Of course not, it just defers the day of judgement ever further. Since the people who pay taxes are in the main those who already have money, they are the ones least likely to be having problems. What we do need though is a realignment of our tax system so that the obscenely wealthy pay a higher proportion of tax, and those on low salaries pay less. This has beneficial knock-on effects that might not be immediately apparent. For example, if a City trader had paid considerably more of that end-of-year bonus in tax, he would have had somewhat less left to spend on property; that would have reduced the inflationary spiral of property prices not only round London and the home counties, but across the country as a whole as demand for second (or third, or fourth) homes would have been reduced.

When Gordon Brown took over as PM he promised a Government of 'all the talents'. If he still holds to that, he should get down on his knees and plead with Vince Cable to join the Cabinet as Chancellor. Unlike his Labour counterparts, Mr Cable doesn't hold back from saying the unpopular, that the only way to justify tax cuts for the low paid is to increase them for those who earn above the norm. In the end public services (and other debts) have to be paid for and by the public, not by paying derisory wages to those who work in the sector.

In the meantime, Gordon's decision to scrap the 10p tax band is looking increasingly foolish.

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