Is
The Tory Growth Plan published last Friday is an expression of libertarian right wing ideology.
It represents a public resilience challenge we must all be aware of.
Rich people and companies have been given huge tax reduction incentives to supposedly drive increases in GDP.
This is a great leap of faith which must be examined.
Rich people and companies have a low marginal propensity to consume. Out of any increase in disposable income they either save or spend on investment.
They are less likely to spend on consumption. Poorer people have a higher marginal propensity to consume and they are the ones needing to be helped because they are more likely to spend in the local economy and contribute to the circular flow of income in that economy.
The reverse seems to have happened and this just isn't sustainable.
In terms of investment in the UK it has long under invested in private sector unvestment in comparison with its peer OECD countries and this worries me because it goes against the ideology which has been submitted.
If you give rich private individuals and companies additional post tax disposable income they are more than likely to save it rather than consume or invest it and that is the real issue here.
There can be no real guarantees !!
We live more in hope than in expectation which is untenable.
Most wealthy people are in London and the South East in a region with will also benefit more from stamp duty changes. This is hardly a great deal for the levelling up agenda?
The tax reductions are unfunded and will be largely paid for by borrowing which will fuel our current level of government debt which is now over £2 trillion, a huge amount. The ni changes announced by Rishi Sunak barely 6 months ago which were supposed to fund the NHS covid backlog and social care have now been withdrawn and instead will be funded by borrowing.
The IFS has stated that borrowing could reach £190bn in 2022/23 some 7 5% of national income and this would be unsustainable in the long run unless the economy reaches a trend growth rate of 2.5% of GDP per annum speedily.
It is now much less than 1%.
This is a huge risk for us as a country and if it doesn’t happen there is a very significant risk of public spending cuts by 2025/26.
Relying on growth to fill the gap left by tax cuts is very risky and if that doesn't happen then taxes will have to rise in the future.
Efforts to limit unit energy price rises for consumers and small businesses have been taken on the same basis, borrowing money to fund the energy producers instead if taxing their profits with more substantial windfall taxes.
This approach epitomises a dash for growth which is supposed to provide the remedy for unfunded tax cuts.
There are several issues with this. Slow annual growth in the UK has been a perennial problem in our country which stems from several causes such as :
Low investment in plant and machinery
Poor workforce traning
Low productivity
Bottlenecks in labour supply
Lack of a respect for a vocational training culture
Long term investment being sacrificed for short term profits.
Low worker productivity
All these factors need to be specifically targeted to improve growth and it just isn't good enough to give rich people and companies more money because that in itself isn't enough for a UK growth strategy.
The target seems to be a per annum growth rate of 2.5% of GDP.
I presume this is for an average of the whole economy?
We have 9 regions and 4 countries in the UK. The Tory document stays silent on the predicted GDP growth levels for each region and country.
What are they and when are they meant to be achieved?
London, the South East and Northern Ireland seem to have done well in GDP growth terms recently but the rest of the country less so.
Where does this leave levelling up
?
Interestingly the Bank of England is now pursuing a monetary policy of raising interest rates to control spending which is diametrically opposed to the tax cuts policy of the current government.
How does that work?
Table 4.3 of the Tory Growth Plan is very interesting but has not been publicised very much.
After 3 years of the plan cumulative GDP growth should equal 2.5% and tax receipts recovered should total £23bn.
After 5 years of the plan cumulative GDP growth should equal 5.1% and tax receipts recovered should equal £47bn.
This is approximately equal to the tax reductions in 2026/27.
Can we believe this?
Will these measures lead to the necessary higher growth to save us from disaster?
I'm really not sure at all.
This is a huge economic gamble which may end up costing us a great deal.
One issue to note is that the results in table 4.3 will come to pass after the next election.
Is that a coincidence?
The Growth Plan is an unimpressive document but the main messages of it in tax saving terms are as follows, per annum:
2022/23 - £60bn energy support
2022/23 -£19.2bn
2023/24 - -26.7bn
2924/25 - £31.3bn
2025/26 - £39.4bn
2026/27 -£44.8bn
Therefore by 2026/27 tax cutting measures will be circa £45bn a year.
I'm not happy with the energy savi ng presentation of tax cuts as I thought the majority of them were for 2 years. Is that correct?
These tax cuts appear to be funded by borrowing initially and then higher cumulative economic growth after 5 years will ride in to save the day.
That is the theory. We need to radically increase annual GDP growth coupled with high direct investment.
Unfunded tax cuts are a real departure for Tory economic policy and are really risky.
David Ricardo the famous economist warned against such actions in his 19 century treatise on public sector economics.
He argued that borrowing money to fund tax cuts was a huge error because it would burden future generations with public sector debt that would often lead to future tax rises!
This government believes economic growth can save the day but if growth targets are not achieved then this will either lead to tax rises or public spending cuts.
Let's keep that 2.5%GDP growth rate under review.
So who is correct?
Kwarteng or Ricardo?
It's Ricardo for me every time.
Comments