Left Outside

The Tories’ Plan to sink the (non)recovery

Oh come on guys! Are you doing this specifically to annoy me?

George Osborne should introduce emergency tax breaks paid for by welfare cuts to “shock” the UK economy back to life,  according to the Conservative MP Liam FoxFox called for capital gains tax, currently set at 28%, to be suspended and reintroduced after three years at 10%. These should be paid for by benefit cuts, said Fox… “We need to have a look at everything that we have in terms of paternity leave and all the other things that are there.” He added: “With the sort of economic problems that we face in the UK it is irrational and unreasonable to expect that those in work should keep all their social benefits and workplace benefits should be protected, at the cost of making the next generation unemployed. That is not a sustainable generational compact.”

Liam Fox is proposing a policy which will make the slump worse, not better. Sadly, Liam Fox has chosen to drop this clanger behind the Times paywall so I can’t find the exact quotes or policy. Presuming, rather generously, this is not just a political salvo and is a thought through policy. On its own terms it completely fails, let me explain why.

Let’s leave aside the unsubtle class war and the political manoeuvring – other blogs do that better – and assume this is a serious policy. What effect would it have?

I want to ignore the small details (like fathers not seeing their children grow up or people pushed into poverty) and focus on the macroeconomics, because that is the sort of hip, cool blog this has become daddio. Fox is portraying this as a “shock” treatment to promote a rapid economic recovery. This is bullshit, in the classic sense of the word. Fox is indifferent to whether it is true, it just sounds good, so he says it. The policy is a jobs killer.

To understand why just think of Fox as the anti-Simon Wren-Lewis. David proposes a balanced budget multiplier. If the problem today is too little demand and a fragile debt market then the solution is normally simple – cut interest rates. At the moment interest rates are at zero so some help from fiscal policy may be necessary. [1] Normally this refers to deficit spending, but if you’re genuinely worried about debt this is unacceptable. You’re left with one option, raise spending and raise taxes. In doing so you increase demand because, although all the money is spent now, some of the money taken as taxes comes out of savings, not consumption. This means aggregate  consumption increases temporarily. No increase in debt, but more demand.

Liam Fox is demanding the opposite cut taxes and cut spending. In his scheme welfare payments are cut; this self evidently leads to less spending because nearly all benefits are spent. They are cut to give businesses and the wealthy a tax cut, some of which will be saved. We know lots of it will be saved because firms are already sitting on a cashpile of £64bn, which they are not spending. So if make the safe assumption that Liam Fox is proposing this policy to be fiscally neutral, then there will be no increase in debt, but there will be less demand.

Quite how a policy which reduces aggregate demand is meant to “shock” the UK economy into recovery, I don’t know. Thus I conclude: Liam Fox, bullshitter and class warrior.

_____

[1] The Bank of England could theoretically offset a policy this stupid, but will they? Well, with the most incompetent central banker in Britain’s history behind the tiller, I’m not confident enough to try. Fox is either a brave man or an idiot…draw your own conclusions from that little thought experiment.

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When NGDP is Depressed, Employment is Depressed

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