Economic Illiteracy and Dogma: this Budget encapsulates it perfectly


Emile Woolf, Going Postal
Gladstone’s red box
The National Archives UK profile, No restrictions, via Wikimedia Commons

As usual, the meaningless minutiae of tax-fiddling in last week’s budget stole the headlines and obscured what’s really going on. It would help if the linguistics were clearer: a tax “cut” should simply refer to a decision to leave taxpayers with a little more of their own money. An “unfunded” tax cut is taken to mean that the state has not imposed a matching tax rise on something else. The ultra-vigilant Office of Budget Responsibility (OBR) is always ready to squawk (as it did when Liz Truss attempted to kick-start growth by reducing taxes) if a Chancellor dare introduce a measure that threatens to undermine the OBR’s  own estimates of available “headroom” – or its highly questionable forecasting track record.

Here are the basic truths still requiring emphasis:

1 – Tax cuts:

Even members of the public are beginning to believe the statist notion that a tax cut must somehow be “paid for”, when the truth is that a judicious reduction in the rate of tax actually increases the amount of revenue raised. Simply put, cuts in the tax-rate pay for themselves: the wealth they generate exceeds the lost tax.

2 – Fiscal “drag”:

This pernicious and thoroughly dishonest ruse forces more people to pay more tax for no reason other than the fact that the Chancellor has frozen the thresholds at which a higher tax rate bites, and taking no account of the real impact of inflation on living costs – in other words, ignoring the loss of purchasing power of the incomes on which the higher taxes are levied. No wonder these are commonly referred to as “stealth” taxes. I prefer the more accurate term: “theft”! This is a major contributor to the fact that the UK’s level of taxation is at its highest since 1948, with no sign of it coming down in the near-term.

3 – Government Spending:

Any increase in the amount of revenue raised is a real gain only if not blown wastefully. But with 6 million people already on the state’s payroll, and rising, whether in local government, quangos or money blown on grandstanding projects on which no one would risk their own money, a serious cut in public spending should now be at the forefront of any growth plan. But it isn’t. Indeed, any credible growth plan would require deregulation, increased housebuilding and dramatically reformed welfare.

4 – Debt-to-GDP Ratio:

There is no prospect that general living standards will recover to pre-pandemic levels while government talks of economic growth, but when the only growth is in the cost of welfare. This generates higher and higher debt levels – currently over 100% of GDP. Short of inflicting a gross level of austerity, no government can borrow its way out of a severe debt crisis. It started with the last financial crisis, from which nothing has been learnt. In 2012 the US Fed and the Bank of England, with their respective Treasury departments in tow, invented Quantitative Easing (QE) – a fancy name for borrowing at suppressed rates with the aid of a printing press – to bail out crooks who rigged the banking system by making loans secured on worthless fluff. In an ineluctable display of chickens coming home to roost, the Treasury and Bank of England were then forced to reinstate interest rates to provide a half-decent return to savers after more than a decade of distortive suppression. But when government cannot afford to pay interest on its own debt what will it do? Here beckons hyperinflation: just to “unwind” the effect of 10 years’ QE money-printing would, according to the OBR, now cost UK taxpayers £104 billion.

5 – Economic Inactivity:

The post-pandemic rise in worklessness, once believed to be a temporary phenomenon, doggedly persists. The number of working-age adults who, since the pandemic lockdowns,  have abandoned the workforce has reached 700,000, with one-third citing “long-term sickness” as the reason. Most of those receiving incapacity benefits claim to be suffering from “mental health” conditions – depressive disorders, stress, anxiety disorders and autistic spectrum diagnoses. Claims based on psychiatric illness have risen by 50pc since 2019, and now account for 1.3m people. Indeed, more than a quarter of all “sick days” claimed by NHS staff themselves, are accounted for by psychiatric conditions. In passing, it’s worth noting that strikes in the NHS have caused 1.5 million GP appointments to be rescheduled.

6 – Cultural Factors:

In the terrifying linguistics of contemporary bien pensants, “employees” are now “human resources”. No doubt the unsought promotion cheers them immensely, but a curse comes with it: we now inhabit a HR State. Attempts to shift laggards into gainful work are frowned upon as unkind, despite the fact that work can be beneficial for mental health. Taxpayers are lumbered with the rising cost of benefits, while public services decline. The HR State is as insidious as it is ubiquitous. Normal, everyday interactions are increasingly governed by rules on permitted words, and words that might make a hearer feel threatened or “unsafe”. As for the real-world workplace, different jobs attract different wages because they are different. The laws of supply and demand are not suspended – they apply to skills as much as to tins of cat food – that is, until HR intervenes, and a judge holds that two jobs are of equal worth, thereby deciding an issue on nebulous grounds of “fairness”.  A local government council that breaches the law on “fairness” in, say, determining staff bonus levels, now faces existential financial penalties. It is no wonder the torrent of lawsuits against Councils have already resulted in 16 of them declaring themselves insolvent! This isn’t economics anymore – it’s a replay of Marx’s theory of value, in which price is determined by everything except the customer!

7 – Is there  a real leader out there? Anywhere?

Yes – Javier Milei of Argentina has shown that tax cuts work if matched by spending cuts. He has halved the number of government departments and fired 30,000 public sector workers. In Britain, by contrast, the state payroll has gone up by  200,000 over the past 8 years. Whereas Milei’s deregulation bill will remove the state from every needless area, and is privatising 41 state enterprises, Britain hasn’t privatised anything since 2015. Investment is returning to Argentina, and in January its government took in almost $600 million more than it spent, its first budget surplus in 12 years. Milei supports free trade and is dismantling Argentina’s complex array of import and export controls. Above all, he shows that nothing makes a country wealthier than liberating enterprise while protecting  private property. If he succeeds in implementing his reforms his country will at last fulfil its colossal potential – and set a desperately needed example.

© Emile Woolf March 2024 (website)