The FT has an article today which begins be saying:
Chancellor Rishi Sunak has told Conservative MPs he wants to use his March Budget to start restoring order to the public finances, as he attempts to put “clear blue water” between the Tories and Labour.
The message is fourfold, apparently.
The first is that Sunak has told Tory MPs that there is no magic money tree.
The second is that it apparently shrivelled and died when continued support for universal credit won support from some Tory MPs.
The third is that austerity must begin, or the Tories will apparently forever look like Labour by suggesting that there is a bottomless pit of money that they can spend.
In which case, the message is that tax increases will start in March. Expect a 23% corporation tax and increases to capital gains tax in that case. Income tax, VAT and national insurance are all ruled out by ejection promises.
So what is there to say in response?
First, that no one now believes that there is no magic money tree. It has been proven to exist. Whether that implies acceptance of modern monetary theory or the simple evidence that QE has been wholly funding a deficit of £400bn in the last year is neither here nor there: the simple fact is that even the hardest nosed sceptic knows money can now be created by the government at will without either necessary tax or inflation consequences.
Second, I took part in a meeting of economists yesterday where it was said in good faith, and I think correctly and not by me, that there is now a consensus amongst all credible economists that now is not the time for either cuts in spending or tax increases (excepting, maybe, for redistribution). The agreed reasons were that this crisis is far from over yet, and the economy has further to fall as yet, meaning that any such changes would hit as matters were getting worse, economically.
Third, such petty politics will be very obviously that. They will be seen as simple game playing when that is inappropriate.
And fourth, whatever Sunak does is gesturing. The next year is going to see the third biggest UK deficit ever, at a minimum. The chance that it will be less than £100bn is close to zero. It could quite easily become the second biggest ever by exceeding the £150bn or so of 2008/09. And things will not be much better (if debt fetishism is your thing) for the years that follow up to 2024.
So, arguing that the magic money tree has ceased to exist is futile. It clearly will not have done.
Arguing that universal credit cannot be afforded will in that case clearly look like victim selection.
Tax increases, without equitable rather than social justification, will also very clearly look wrong, and petty (as they will be, that justification excepted).
And since that justification requires matched spending to make it work any reference to debt reduction could easily backfire, especially when the economy has a long way to go down as yet.
So what could Sunak do? He could openly redistribute, and take the wind from Labour's sails.
He could attach conditions to savings tax reliefs and link them to green investment, as I have long argued to be necessary.
He could restructure allowances on pensions for the wealthy. That is simply something that is overdue.
But in each case he would have to prove he was spending to justify the change. Because what people now know is that this economy is on the life support that only government money creation can supply. And as a result they are not going to be happy letting it go.
Sunak can try being the petty Chancellor. But he would be best not to do so.
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Order?
You cannot impose ‘order’ on a virus as adaptable as Covid-19.
The supposed ‘order’ imposed by Sunak’s colleagues has not worked?
Sunak is your typical stupid Tory really.
What Sunak will do, what he should do and what he will end up doing will all be different.
He will implement austerity (careful stewardship of the public finances or some similar rubbish slogan) possibly with something like an increase in the tax-free allowance so as to get a headline grabber with the lamestream media.
What he should do is announce sufficient spending to ensure the country (the people, the economy) can get through to the other side of this. Or at least to the point where we are through the worst.
What he will end up doing is spending anyway but it will be in a reactive way trying to plug the holes as they appear and no doubt the ‘chumocracry’ will be the main beneficiary.
Craig
P.S. Is Sunak actually stupid and believes this will work or is he a huge con artist and knows exactly what he’s doing and how things work?
It seems that the possible tax increases will (by accident) be ones that do least damage (Corporation Tax and Capital Gains Tax) and might even have some merit …… as long at they are matched by greater spending where it is needed. But this is still a struggle for the Tories. The stinginess with which “little people ” are treated versus “big business” is utterly absurd. How can it make sense to spend £22bn on Track and Trace yet refuse the extra £1bn required for payments to low income workers to make the system effective. “Spoiling the ship for a ha’penny or tar” is a phrase made for this stupidity.
Finally, 6 months after this problem was identified and only when the utter failure of the existing system has been exposed are they are “flying a kite” about one-off payments to self isolaters.
So, kicking and screaming, the government might be headed in the right direction (albeit 6 to 9 months late) where CT and CGT are raised and transfer payments to low income people are raised. Let’s hope so.
It is about politics and priorities. Sunak wants to differentiate Conservatives from Labour, which seems to mean driving more people into desperate poverty (although I though Johnson was meant to be about a new One Nation “levelling up” version of Conservatism). And £20 per week on Universal Credit means about £1000 per year, for 6 million people, which means about £6 billion. It is not an enormous sum in the context but could be spent on armaments or consultants instead. And go hang the multiplier.
Another side of this is continued selectivity of coronavirus support, which indicates it is badly targeted and underfunded. Many people didn’t get £20 per week, including those on disability benefits such PIP or ESA. Many are not getting discretionary support from local authorities. Many are not getting furlough support, or the support for the self employed. The support is still not available fairly to all.
‘Income tax, VAT and national insurance are all ruled out by ejection promises’
I think ejection rather than election is a brilliant example of a ‘Freudian Slip’
No, just inability
But I am not changing it now
Brilliant typo in paragraph beginning “In which case…”, it says: “…insurance are all ruled out by ejection promises.” Ha ha, should that have been ‘election’. Oh if only it could be an ‘ejection promise’!
Otherwise, I shan’t be holding my breath Ricahrd. Ta for all the good work.
🙂
Dear Mr.Murphy
I distinctly heard you say on the Alex Salmond show yesterday that the monies borrowed by the Government “do not have to be paid back”. Was I dreaming when you said this, or is this some kind of Keynesian economics turning a magical turn??
Yours truly fascinated and curious admirer,
Alex Stroud
I was using the logic of modern monetary theory
Lots on it on this blog or look it up
I love the idea of ejection promises ruling out a VAT increase but election would be better
The BBC Radio 4 Today this morning programme announced that last months deficit was £34 billion and inferring that all this has to be paid back sometime and that a £2 billion extra spending per month on the leaked proposal to pay all Covid 19 victims a lump sum of £500 each (regardless of their personal circumstance and financial position) would be “unafordable”. I can just imagine the expression on Richard’s face if he was listening to this rubbish!
I would have been yelling
That calm guy on the videos can sometimes shout at the radio
Don’t be daft, he ‘s not going to do any of that. 🙂
He is a Tory and like a robot that has had is circuits shorted, he will just keep repeating the same crap. They have been taught to think like this all their lives and just cannot let it go. The fact that Sunak, a Tory Chancellor, has just broken the myth that the state can indeed create vast amounts of money at will must break his frozen heart.
The cognitive dissonance going on in his head must be mind blowing.
I Like the typo in the article about “ejection promises” – if only we could eject the Tories
I think I will leave that one then….