Kali Yuga

The level of economic understanding has never been lower

My last essay focused on the sheer insanity of current pseudo-Conservative policies. I sent it out on the “Going-Postal” blog platform, and was rewarded with some 3,700 responses, several of which went to the heart of the subject-matter of the essay. Their consistent theme was bewilderment that a Prime Minister elected to act on principles of low taxation, free trade and post-Brexit dismantling of bureaucratic regulation was instead implementing policies that embody the very opposite.

Well, he has now met his come-uppance and been forced out of Downing Street – yet it’s a tragic reflection on the calibre of UK governance that those key ministerial resignations and the ousting of the PM were triggered, not by the destructive perversity of its policies, but by widespread revulsion at repeated episodes of sleaze, dishonesty, lying and deception.

In a moment of reflection I revisited the ancient Hindu text on the four great cosmic cycles. The hallmark of the first cycle is that the people do not know they are being governed; in the second cycle they revere their leaders; in the third, they respect them. In the last cycle, the Kali Yuga, or age of the beast, they revile their leaders. Any suggestions on where we are?

Supply-side reforms

In that essay I set out the rules of supply and demand that, “all other things being equal”, dictate the price level. I explained why the Keynesian demand-management formula for kick-starting a flagging economy is pure fantasy – as we now know after a decade of unbridled money-printing. In one of the last speeches of his comparatively brief tenure Boris Johnson cited his determination to emulate Margaret Thatcher’s legacy. But he failed to make any reference to the “supply-side” of the economy, the reform of which was her most significant contribution – and, incidentally, the basis of her uniquely positive collaboration with President Ronald Reagan.

The term “supply-side” distinguishes production from consumption which, by and large, looks after itself if markets are allowed to operate freely. An increase in the supply and availability of goods and services (not through government price-controls or any other form of state intervention) causes their market price to fall quite naturally. The reason Johnson didn’t refer to supply-side deregulation is that, despite all his familiar bluster, his grasp of basic recipes for growth has always been negligible. Indeed, few, if any, of the current crop of top-job contenders show any real understanding of the most needed policies, or of having learnt anything from past fiascos.

Declaration of unilateral free trade

The economic philosophy that should have been introduced after the 2019 election would have embraced a declaration of unilateral free trade. Instead we are mired in the deepest round of protectionism for a generation. Tariffs slapped on imports of foreign steel make it more expensive for use in housebuilding, construction and heavy industry. If foreign producers can provide us with high-grade steel at lower prices, vote-seeking politicians who force us to pay for higher-priced domestic steel should be sacked. Far better to dismantle the regulatory regime that increases our domestic costs.  Any half-decent trade secretary should repeat it daily: “tariffs hurt only the countries that impose them – domestic consumers are always the losers!”

Central banks are in panic-mode

Having spent most of last year in denial, arguing that all those severe inflationary indications were merely transitory, central bankers now facing the consequences of their orgy of monetary expansion don’t know where to turn.  They are confronted by the worst of all worlds: a brutal recession and runaway prices – yes, both.

Let’s dream that our policy-makers suddenly become capable of clear thought. (I know that’s far-fetched, but indulge me!) The Chancellor in my dream recognises that printing still more money, the standard remedy for every setback, has been a cause, not a cure, of the nation’s woes and is now strictly a no-no. Since our dream clearly sets no limits to fantasy, it even has the Treasury reducing the tax burden. Take fuel prices: the largest slice of petrol and diesel costs at the pump goes directly to the Treasury. It is therefore in its gift to funnel it straight back to households and businesses by cutting the tax component in energy and fuel costs.

In my dream a new chancellor concedes that his predecessor’s plan to raise corporation tax to the French level of 25 per cent next Spring is not, after all, the greatest idea for helping ailing businesses to weather the cost-rises they now face, nor for making post-Brexit Britain more competitive. My new chancellor has decided to update income and inheritance tax brackets in line with inflation – thereby reversing Sunak’s decision to freeze existing brackets, which dragged two million people into higher tax brackets  since our “low-taxing” Tories won the 2019 election. He loved the way that government-induced inflationary momentum increases the tax haul without having to pass any further unpopular budgets.

Tax reform? There’s no method in this madness

The government’s manifesto undertakings have fallen by the wayside. All its avowals of faith in the economic benefits of low taxes have been shown to be lies from the start. Conservative UK is now without doubt a “high-tax” jurisdiction. Over the past five years it has lost 12,000 higher-earners following the surge in inheritance tax bills and repeated Sunak-style tax raids, not to mention his wholly unprincipled proposals for a swingeing wealth tax. Will the next Chancellor recognise that, whatever populist label he attaches, all taxes are ultimately borne by people who detest a faceless authority pretending to know how to spend other people’s money better than they do themselves?

Had Johnson been true to the principles that got him elected he would have known that inheritance and capital gains taxes are just about the most pernicious ever contrived, being taxes on the inflation inflicted by government itself, levied on money that has already been taxed. VAT too is the work of the devil, being a sales tax that penalises all commercial activity and hobbles growth.

Globally determined tax rates

Our appallingly unprincipled notions of taxation are reflected in our signing-up to President Biden’s initiative, unveiled at October’s G20 Summit, of establishing a minimum global corporate tax rate. Supported enthusiastically by the EU, the nonsense Biden spouted claimed this was a huge step towards a “fairer” global economy. As you would have expected, the French finance minister whooped that “the race to the bottom is over –  this will stop companies shifting profits to lower-tax jurisdictions and compel tech companies to pay their fair share” – as if those mentally challenged fools, steeped in the miasma of socialist wealth redistribution ideology, are capable of knowing what’s “fair”, having for so long been cocooned from any need to work themselves.

Biden’s proposal to impose a minimum global corporate tax rate of 15 pc was signed up to by 136 countries under the banner of ending “harmful tax competition” and raising extra revenue of $125bn for participating governments round the world. Yet hardly any of those he arm-twisted into signing up have actually implemented it. Hungarian and Polish businesses, for example, have refused outright and in the USA the Republicans are blocking the deal’s ratification. Even the pro-EU Irish government, with one of the lowest corporate tax rates in the world at 12.5 pc, has said it will not raise it to 15 pc until the rest of the world implements it!

If companies see advantage in shifting operations to places where they are charged less for existing there, so be it. Global competition is one of the most effective ways to curb the voracity of finance ministers. Biden’s sole motivation was to reverse Trump’s tax cuts and raise more money for his own extravagant spending programmes. In any case who, in their right mind, would vote for globally imposed tax rates over which national administrations have no control?

The single most crucial need for a new government is to cut state spending – and being dumped in the current economic morass should encourage some straight thinking. Yet welfarism reigns supreme, even to the extent of abandoning conditionality when benefit-seekers turn down jobs or miss interviews, despite today’s extreme labour shortages. The discipline of  limiting benefits to people who are actually needy is as remote as ever.

What an opportunity for a shift to real, positive, growth-oriented policies. We live in hope!
 

© Emile Woolf July 2022 (website)