The deeply embedded disconnect between hype and reality looms larger than ever in government thinking. A little over a year ago Liz Truss attempted a dose of supply-side reforms to address the country’s desperate need for real economic growth, rather than that bogus metric – GDP. Her political timing was misjudged and her presentation too forthright for financial markets focused on exchange rates, government bond yields and, as ever, inflation. Political rivals lined up against her. Rishi Sunak grabbed the reins and retained Jeremy Hunt as Chancellor after Truss resigned. In his early comments Hunt declared that tax reductions proposed by Truss would fuel further inflation and would have to wait until he had conquered it. But how?
He embarked on a strategy of raising interest rates, reversing the policy of suppressing (almost extinguishing) them for more than a dozen years. The logic pursued by successive Tory Chancellors runs something like this: in a low-interest regime borrowing, including government borrowing, is cheap. This reduces costs and enables businesses to reduce their prices, thereby stimulating demand – the objective at the heart of Keynesian doctrine. However, this narrow view ignores “Say’s Law”. In 1803 Jean-Baptiste Say pointed out that there is no point in encouraging demand if there is nothing to supply: the key to economic growth is not increasing demand, but increasing production: “all purchasers must first be producers, as only production can generate the power to purchase”.
Unlike “supply”, “demand” is always there. Because it is a fundamental human condition, it cannot usefully serve as an economic target. Production, by contrast, is crucial. But while penal taxes and regulatory overload stifle innovation and productive capacity, economic growth remains a far-off dream.
While having to contend with this statist psychosis Jeremy Hunt presented his Autumn Statement. He claims that his policies have “halved inflation” from 10.7pc to 4.6pc, referring to prices rather than increases in the money supply – the real measure of inflation – but we can let that go. More to the point is that the sharp falls in global gas prices, leading to cheaper electricity, had nothing to do with Mr Hunt. By using stealth taxes to suppress consumer spending he will indeed have caused some prices to fall – but not the most important one: food prices have gone up by more than 10pc. Half our food is imported at weak exchange rates, reflecting low international confidence in our economy. Although Hunt didn’t comment on that, the public recognise the difference between price reductions attributable to (i) the tyranny of high taxes and (ii) higher production.
Having learnt to sound the right noises, the Chancellor stated how acutely aware he is that the nation’s wealth can be advanced only by expanding productive enterprise – hence his new theme tune of “making work pay”. He would also like people to believe that Britain’s tax burden is on a downward trajectory, but that is far from the case. To pay for the profligacy of so many years of addiction to money-creation under quantitative easing, including three years of hit-and-miss welfare giveaways under lockdown, Hunt’s predictable tax-raid can be neither avoided nor concealed.
The Autumn Statement is a master-class in the “now-you-see-it, now-you-don’t” style of fiscal conjuring trick. By freezing the thresholds at which higher tax-rates come into play Hunt has effectively undermined his own central message of making work pay. The reason this is called “fiscal drag” is not because even the low-paid are being progressively dragged into the tax net! But it explains the mechanism whereby the UK tax burden will rise in each of the next five years, reaching its highest level since WW II, as projected by the Office for Budget Responsibility.
Finally, Mr Hunt can’t see that government exemplifies Parkinson’s second law: work expands to fill the time available. Or, more aptly in this case, work expands to the limits of departmental budgets (plus10pc). His naivety is reflected in his fanciful assumption that he will curb waste and keep departmental spending at existing levels in cash terms over the next five years – a piece of magic he will achieve, he claims, by applying the power of productivity-enhancing Artificial Intelligence.
In my recent essay on the limits of government power I referred to the rash of regional councils that have blithely declared themselves bankrupt and then queued up at the Treasury for a taxpayer “bail-out”. The latest culprit is Labour-run Nottingham City Council, forecasting that it’s heading for a cash overspend in the current year of £23 million. Minister Robert Jenrick declared that the Council’s incompetence had “let residents down for long enough” – but with no adverse consequences for the squanderers themselves.
Just as Downing Street lockdown parties took place because participants didn’t believe the restrictions applied to them, Chancellors who waste taxpayers’ money suffer no financial penalty.
But they do defile the sanctity of private property.
© Emile Woolf December 2023 (website)
