Liberal Vision

Labour VAT move is half right

Shadow Labour Chancellor Ed Ball’s call for a permanent or temporary VAT cut puts him half into the same camp as liberal think tanks who opposed the VAT rise in January. Philip Booth, Programme Director at the Institute of the IEA wrote 

“Today’s VAT rise is simply bad economics… If the government insists on increasing taxes, there are better candidates than a general VAT rise.”

 Where Balls and Booth part company however is on the flipside of the balance sheet. Booth writing:

“Today’s news should be a wake-up call that the spending cuts are insufficient. If the government wishes to prevent growth from stalling, it will cut spending further, not burden the population with an unnecessary tax rise.”

Balls, a Keynesian of sorts, remains convinced stimulating demand alone can restore growth.

Economic growth fundamentally is based on doing new things and more commonly doing old things more efficiently. It is a supply-side issue.  If you increase the money supply without improving productivity you just increase inflation. Interest rates rise, we are all worse off.

Two important element of Keynesianism are also missing from the Shadow Chancellor’s analysis . Firat that the last government, of which he was a leading player, should have been running a surplus during the long boom in the last decade. Not a deficit in every year since 2001. The surplus would have taken some heat out of the boom, and provided a fighting fund for the crash.  

Second Keynes did not confuse government spending with government investment. Investing in infrastructure such as roads, or development such as scientific research is clearly a very different growth proposition to spending on welfare and public sector pensions.

In that regard Balls is not a very good student of his own economic philosophy, Keynes did not advocate profligacy. A VAT cut without corresponding reductions in unproductive spending would be just that.

How to introduce a minimum wage without raising unemployment

Whenever discussions of the minimum wage come up, supporters of a legal price floor are quick to point out that the introduction of the minimum wage in the UK was not accompanied by rising unemployment, as economic theory would suggest.

What explains the labour market’s seeming resilience in the face of what should be a very bad policy?

Over at the IEA blog, I discuss three reasons why unemployment may have appeared to have been unaffected by the introduction of the minimum wage. Please take a look and feel free to comment on their discussion thread.

The moral case for liberalism

When liberals make the case for liberalism they tend to focus on the importance of individuals running their own lives.  They also tend to get bogged down in explaining why markets work.

Their opponents focus on what will happen to the poor if markets were unregulated or introduced into public services.

In that debate it is easy to fall back on technical arguments and miss the bigger picture.

While some liberals will make a moral case for liberalism it is not done in a consistent manner.

Perhaps it is time to start talking far more about how a more liberal world would mean less poverty, how inflation and debt create more poverty by trapping those who are already poor and dragging others into poverty.

The Observer fails to fact check its front page pro-Balls set piece

Ed Balls’ spin doctor, Alex Belardinelli, sent out an excited press release on Saturday revealing that the Observer was to “splash” on a predicted rise in household debts.

“These figures underline Ed Miliband’s warning about the cost of living crisis facing families in the squeezed middle,” it said.

Of course, this wasn’t the Observer’s splash, but Balls’ man was right that his story would appear on the Observer’s front page the next day.

Unfortunately, the second paragraph of this story got its facts wrong.

“The Office for Budget Responsibility has raised its prediction of total household debt in 2015 by a staggering £303bn since late last year,” it says.

Not true. In the OBR’s forecasts “late last year” (ie. November), debts were forecast at a revised £2,113bn. The latest forecasts are for £2,126bn.

This is an increase of £13bn, or 0.6%.

It is not an increase of £303bn, which would be a 14.3% jump.

A big hat-tip to David Smith [@dsmitheconomics], economics editor at the Sunday Times, for pointing out the error.

What the Observer meant to say, Smith calculates, was that the figure has increased by £303bn since last summer.

At that time, last summer, inflation was at 3.1% (CPI), while now it’s at 4.4%. Spiralling inflation might just have something to do with the rise in the figure.

The Observer article is packed with quotations from and citations of Ed Balls (funny, that), Labour MP Chuka Umunna, the Labour-leaning IPPR, and the socialist-Keynesian’s favourite economist, Paul Krugman.

It is bylined, incidentally, by the Observer’s political editor and policy editor – not the economics team.

The OBR’s March report, which the story is based on, also revealed that government sector debt net will break through 70 per cent of British GDP by 2013-14.

The UK’s net debt (note to Balls – this is different to the “deficit”) hit £875.8bn in February, while government spending has increased since Osborne arrived at Number 11.

Central government spending alone is up over £30bn compared to the same time in Labour’s last fiscal year.

And yet it’s “cuts” that are responsible for our economic plight? The Observer and its pals needs to get its facts right.

Cutting the throat of the black gold goose

Hammer of the oil companies George Osborne is a greater environmentalist than economist. Or is he?

The impact of the his 12% hike in the North Sea supplementary charge; on top of two 10% rises by Gordon Brown last decade, has seen a roll call of firms suspending or scrapping major investment deals in British waters.

City AM has been following the stories over the last week, the most significant of which was a £10bn investment in Mariner and Bressay by Statoil.

The short term impacts on the UK tax take are unclear. Existing fields facing marginal tax rates of 62-81% will continue to produce. In the short run the world price of oil is more important than investment.

In the long run the Chancellor will be testing to destruction… again… the problem that high taxes don’t work. Investors don’t tend to volunteer to make their money work more for the Government than them.

A view strongly expressed previously by the Scottish Liberal Democrats, who campaigned vigorously against Gordon Brown’s looting. They may be wondering why a Scottish Liberal Democrat Chief Secretary to the Treasury didn’t stop this, knowing has he does, that when the rate, last doubled investment in the North Sea fell 25%.

But isn’t this good for low carbon energy?

The answer is no.

First oil and gas companies are international. Investment moves around the world looking for the best returns. That movement is limited by cost and national monopolies, but as some opportunities become more expensive, others such as oil sands and deep water drilling become more attractive. No carbon is saved, it just gets drilled elsewhere. Some of those alternatives produce more CO2, in production, than drilling the North Sea.

New opportunities in the North Sea are already expensive due to natural considerations; the hostile climate West of Shetland for example. And in decline. Creating fiscal barriers on top of that, whilst Barack Obama for example is offering tax breaks, is uncompetitive.

No low carbon technologies are yet in a cost effective position to displace oil and gas as primary fuel sources for transport and electricity generation. They will get there, one day, but to do so require investment. That investment in turn, whether public or private, depends on economic growth.

High taxes kill growth. Efficient investment requires exploiting the skills and advantages you already have. Offshore wind for example benefits directly from offshore oil and gas engineering. For green energy to be the future we need energy companies to be successful today.

In the medium term the likely impact of the Osborne tax will be less tax revenue. That could be masked if global oil prices continue to rise, but there will still be a dead-weight loss. If prices fall, it could be dramatic. Gas prices for example are already much lower than oil.

It would be better if oil and gas were treated on a level playing field with other businesses, with special taxes reserved for concrete market failures like mitigating carbon, not revenue raising.

Where hypothecation is useful perhaps it should be towards investment in future energy sources, not reducing taxes at the pump or other pet projects. The Treasury and public sector should be taking the hit on keeping down the cost of living, not the providers of jobs and growth.

The current North Sea Fiscal regime is over complex. The erratic behaviour of successive Chancellors can give industry no confidence in future stability. That loss of confidence, in some respects, is even more worrying than the rise. This is one piece of populism that has backfired badly. The Government should think again.