Liberal Vision

Cloud cuckoo tax

On Sunday the Liberal Democrat Chief Secretary to the Treasury, Danny Alexander, echoed the Business Secretary, Vince Cable, that the 50p income tax rate, introduced by the previous Labour government, was unlikely to be scrapped anytime soon. Those saying otherwise, principally Conservatives, were living in “cloud cuckoo land”. The priority of the Coalition government is and remains to deliver tax cuts to low and middle income earners. The rate though could be reviewed in future.

In one sense, the political, Alexander and Cable are absolutely right, the politics of reducing tax on elites is generally poisonous, particularly so in the midst of a stagnant economy, particularly for the Liberal Democrats. To be achieved, politically, it would need to be part of a balanced package to generally reduce tax for everyone. Margaret Thatcher’s governments, for example, reduced all income tax bands, in steps, not just the top rates.

Economically I’m less convinced. The 50p tax rate like all high marginal taxes distorts incentives against work and growth. Highly mobile, highly able professionals, investors, and entrepreneurs can better choose where they work than others. They will be influenced, over time, by relative tax rates, alongside other factors. It is heroically naive to make good-will, inertia, and patriotism the basis of tax policy.

Further whatever the alleged benefits of high taxes in respect of fairness, supporting infrastructure and other public goods, most are benefits that do not make a lot of difference to those expected to foot the bill. There is little evidence that high tax rates raise more money.  

High income tax is an experiment the UK has tried before, concluding an economy that needed an International Monetary Fund bailout in 1976. The tax take, and share of the take, from high earners increased substantially after the top rates were reduced in 1979 and 1988.

The 50p rate, to some extent then, is a cloud cuckoo tax. It will be scrapped eventually. The question is when the political circumstances will be right.

Tories call on David Brent to save the UK economy

Politics makes strange bedfellows; coalitions especially. In the 1970s the Liberals made a pact with socialists despite socialism being the antithesis of liberalism; in 2010 the coalition finds us in bed with Conservatives despite the Tories opposing liberalism for centuries.

Coalitions therefore require us to remind the voters how we differ from the parties with which we are aligned in government. This week a new report from the Conservative-leaning think tank Civitas reminds us of one crucial difference: the Tories have always opposed free trade.

Reviving British Manufacturing: Why? What? How? appears to be a throw-back to a former time, when the Tories banned wheat imports to protect the interests of their landed backers. Between fawning praise for Margaret Thatcher (“No one doubts Mrs Thatcher’s commitment to a market economy, [Er… Yes they do – Ed] but she was no market fundamentalist and her pragmatic patriotism is often forgotten“) Civitas suggest that the UK should indulge in one of the most fundamental economic blind-alleys in the Handbook of Bad Government: protectionism.

The reason that Civitas cite for this bizarre and dangerous policy is the UK’s balance of trade deficit, which measures the net flow of payments for goods and services into/out of an economy. Civitas argues that “We already have a balance of payments problem… With the annual trade deficit in goods now at a new record of £97.2 billion… only radical Government action will prevent Britain’s permanent decline as an industrial society“.

In fact, they later admit that the real trade deficit is £46.2 billion, but that they are choosing to ignore the trade-surplus from services. This is an absurd confidence trick, which ignores the fact that the UK’s comparative advantage is in services (Yes, even financial services! – try to contain your disgust). This attempt to make us focus only on one part of the economy is risible: I suspect that if one ignored manufacturing and focussed solely on services one could argue that China is running a trade deficit; if so, the politburo do not appear too bothered.

Even accepting that there is a trade deficit, this does not matter. As Milton Friedman noted, £100 billion is only of use to foreigners because it enables them to buy £100 billion worth of British goods. The pounds themselves are useless to them: “they cannot eat them, wear them, or live in them. If they were willing simply to hold them, then the printing industry – printing [pounds] – would be a magnificent export industry… [that] would enable us all to have the good things in life provided nearly free by the” nations foolish enough to swap perfectly good goods and services for paper adorned with the Queen’s face.

In fact, many foreign nations seem quite prepared to do that, and worse: they then lend the money back to the UK. This has created twin problems: on the one hand, it enabled us to buy even more of the good things in life (such as the public services spending splurge from 2001 to 2010), but only by borrowing against our future and that of our children. Secondly, it kept our currency high and theirs low, thus making our exports less competitive and theirs more attractive, and so exacerbating the balance of trade problem.

The solution, one might therefore think, is to stop borrowing the money. If they can’t lend it to us, they will have to spend it in the UK, and so we will achieve equilibrium in our balance of trade (but with a weaker pound). However, if you are a Tory think tank, there is an alternative: protectionism.

“the Government should encourage an increase in manufacturing output by about £10 billion per year”, the report argues, (why not £11 billion? 12 billion? What’s so special about £10 billion?), but crucially, this should not be done through promoting exports (itself dodgy, but now is not the time), but by import substitution: “exporting is costly… in the short run … it will be much easier to focus on the home market and out-compete importers.”

Import substitution is economic madness: not even Labour recommends this sort of thing anymore. It completely ignores the Law of Comparative Advantage(aka. the Ricardian Law of Association) and indeed undermines the whole basis of trade, which is specialisation and the division of labour.

And what are the four industries that Civitas wants the UK to specialise in over the next few years? Where should we focus our efforts, expanding domestic supply by throwing up walls to prevent cheap foreign imports?

In a companion essay, Civitas cite four particular industries that might not strike the average reader as particularly promising: Paper; Glass; Steel and Motor Vehicles. Admittedly, we have some good companies operating in each of these industries, but the idea that Wernham–Hogg paper merchants will become engines of the British economy is hopelessly naive.

Add to this the suggestion that Britain should establish a “Ministry for Economic Growth, focused purely on reducing the trade deficit through increasing production” (where to begin with this one?) and a tacked-on side-swipe at the European Union and you have a classic piece of Tory wonkery.

In 1962 Milton Friedman argued that “It is not too much to say that the most serious short-run threat to economic freedom… is that we shall be led to adopt far-reaching economic controls in order to ‘solve’ balance of payments problems. Interferences in international trade can seem innocuous: they can get the support of people who are otherwise apprehensive of interference of government into economic affairs… yet there are few interferences which are capable of spreading so far and ultimately being so destructive of free enterprise.”

Danny Alexander is right on pension reform

Trade Unions are organisations committed to getting the best possible deal for their members. Public sector pensions have been a sensational deal for some time, funded as they are by committing future taxpayers to the bill.

The politics then pit a constituency with no votes against one that can mobilise thousands in mass protests and impact millions through economically damaging strikes.

For politicians to resist that movement, instead standing up for the rights and living standards of our children, is extremely brave and should be supported.

The coalition proposal  to  raise contributions and the retirement age is right. Chief Secretary to the Treasury, Danny Alexander, summarises the challenge well:

“(it is) unjustifiable to ask the taxpayer to work longer and pay more so that public sector workers can retire earlier and receive more themselves. This is not an assault on public sector pensions but an attempt to protect them for the long term.”

Industrial Relations – Part Deux

My last contribution on industrial relations law didn’t go down well in some quarters. C’est la vie.

However, it couldn’t escape my notice that the Chief Secretary to the Treasury Danny Alexander had some pretty strong words for the trade unions and the inescapable nature of public sector pension reform today. Although he did not call for minimum turnouts for strike ballots, a few snippets of an article he penned for a newspaper ahead of his key speech to the IPPR are worth highlighting:

“It is unjustifiable that the taxpayer should work longer and pay more tax so that public sector workers can retire earlier and get more than them…There is an indisputable case for reforming public sector pensions. They must be affordable, not just now but in the decades to come; and reform must be sustainable and correct the huge unfairness on the taxpayer and on low-earning public sector workers…”

But particularly relevant to what I said yesterday:

“It is disappointing that a minority of unions seem hell-bent on premature strike action…They are misrepresenting the Government’s position and feeding their members scare stories…

A strike now might be in the interests of the union’s boss, but it is not in the interests of its members. Only one in five members of the Public and Commercial Services (PCS) union voted on Wednesday for strike action – the vast majority realise that such a step is unjustifiable. My message is: don’t let the union bosses sacrifice your pension for their political ends.”

I welcomed Alexander’s resoluteness in seeing reform through, painful as it may be, especially in light of some of the Coalition’s recent U-turns on policy. Whilst the calls for retreat are likely to grow even louder, change is desperately needed and it is in the long-term national interest to see things through.

Reading his piece, I was reminded of what Hal Varian, the Chief Economist at Google, said a few months ago on a similar issue, “Unions have the same problem that democratic governments have: they have a tendency to sacrifice the well-being of future generations relative to current generations, since only the current generation is able to vote.”

Let’s just hope that Alexander lives up to his words. Luckily, I believe he is imbued with the same qualities as Scotland’s other national drink – he’s made in Scotland from girders.

Modernising industrial relations law is a necessity

Today was the day that we learnt that up to three quarters of a million public sector workers have agreed to take coordinated strike action over government changes to pensions.

They really ought to have listened to Vince. Earlier this month, the wise old Business Secretary warned delegates at the GMB conference that whilst the case for changing strike laws was not currently persuasive, “should the position change, and should strikes impose serious damage to our economic and social fabric, the pressure on us to act would ratchet up.”

Despite the recent results of Mugabesque proportions that were widely interpreted as an endorsement of anger against the Coalition, a closer look at the results makes some interesting reading:

• 92% of NUT members backed industrial action against proposed pension changes…but on a 40% turnout
• Likewise, 83% of ATL members voted for action…but on a 35% turnout
• The PCS also endorsed strike action…but on a turnout of 32%

It seems somewhat strange that if so many workers are incensed with the government’s proposals that so few of them bothered to vote. Under such circumstances, one can see the compelling logic of the case for introducing a minimum turnout clause for a vote prior to strike action. In their report Keeping the Wheels Turning, the CBI has already suggested that the bar be set at around 40% in order to make the strike legal. Such a change would make it unlikely that any of the aforementioned ballots (apart from that of the NUT) would be officially permitted.

It goes without saying that introducing a minimum turnout wouldn’t drastically curb the fundamental right to withdraw one’s labour. Indeed, if there is overwhelming support for action, such as was the case with British Airways workers last year, industrial action would still take place regardless of any threshold in place. All that such a measure would do would be to prevent a minority of trade unionists imposing their will over their fellow members and wider society.

Should we not also recognise the ‘right’ of individuals not to have their daily lives interrupted due to the activities of a vociferous minority of trade unionists?