Thursday, 6 July 2017

Austerity? You've Seen Nothing Yet

At Prime Minister's Questions yesterday, Theresa May, reminded the nation that we need to live within our means.  That is the combination of:
  1. Tax receipts
  2. Borrowing
  3. "Quantitative easing" (printing money)
Borrowing means taxpayers having to pay extra interest charges.  Given borrowings are never completely repaid, those interest charges are effectively in perpetuity.  Hence people saying our children and grandchildren will be paying.  They will.

Printing money is a useful option, but inherently generates inflation.  This is because more money for the same amount of economic activity means prices can go up, and they do.  In recent years it's actually been a useful tool in avoiding deflation.  But too much money-printing is dangerous, as Germany found woth hyper-inflation in the early 1920s.  There is a limit, and the recent rise in inflation in the UK means that limit has already been reached.

If we want to spend on the NHS and public services, and the vast majority of us do, then Tax Receipts should be the principle source of the money.

For each different tax, simplistically it is tax rate times value of activities.  For example, VAT is 20% times the value of relevant sales.

An example of a Laffer curve
Jacking up tax rates is not necessarily the answer.  This can reduce the underlying activities that are taxed, and can result in tax receipts going down.  Tax receipts go up from nil as the tax rate rises from nil, and then drops again when 100% tax means few if any people carry out that activity (would you work if all your earnings were taken in tax?).  There is a point where tax receipts are maximised, as shown in principle by the Laffer curve.

So increasing tax rates may reduce tax receipts.  Conversely, reducing tax rates may reduce tax receipts, but may actually increase them if the rate is to the right of the curve's peak..  .

But without doubt, what does increase tax receipts is economic activity. Growth in the economy means more tax.  Generating high growth was how Labour under Gordon Brown was able to afford more for public services.  The problem was that they had nothing in reserve should growth falter. Historically this always happens.  The financial crash of 2008/09 left Labour with massive spend and inadequate income.  The negative difference is the "deficit", which is money the government has to borrow or print.  The deficit is still a problem.  How to fix it is a whole other topic.

But one thing is clear. You wouldn't want an economy lower than it could be.  Governments of all hues do all they can to boost the economy.  You simply don't do things that could risk the opposite.

This clearly shows the drop in the pound;s exchange rate last June
Yet that is exactly what Brexit does.  Whether "Project Fear" was in any way exaggerated, nobody in their right mind takes the risk.   The reality is the pound's exchange rate with major currencies has
plummeted, as reflection of the markets believing the UK's economy will be hit.  That is already meaning higher food prices, as we import much of our food and drink. Inflation means pressure on public sector wages, as was the background to yesterday's PMQs.  Higher public sector wages means a higher deficit.

So Brexit means less tax receipts, and tightening the austerity belt further.  You've seen nothing yet.

Yet the situation is reversible.  The sooner Brexit is stopped, the sooner the pound's exchange rates can improve, as market outlook improves. That means a stronger economy, lower inflation, and more tax available to pay for the NHS and services. 

What the UK needs is a 'Thriving Economy', which is one of The Just Party's principle objectives.  And that can ponly mean stopping Brexit.  Other issues pale into insignificance, and have to be addressed in other ways.

Stop Brexit.  Simples.

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