The Spending Cuts (that aren’t spending cuts)

Just a quick reality check: The UK government has postured and made a loud noises about their so-called “spending cuts”, and, indeed, the opposition in the UK have also waxed lyrical about “savage cuts”.

Well, here, courtesy of the office for budget responsibility, are those “cuts”, and the projected “cuts”, in full:

Total Managed expenditure

2012-13: £701.9bn

2013-14: £717.8bn

2014-15: £730.5bn

2015-16: £744bn (OBR figures Autumn 2013)

Advertisements

The Help To Buy “Time Bomb”

The classic definition of madness is doing the same thing over and over and expecting a different result each time.

British Prime Minister David Cameron seems very chuffed that his new Help To Buy Scheme is seeing such a large number of applicants right away. But I wonder if this isn’t another financial ticking time-bomb that’s set to go off, in a similar (if not smaller) manner that the last housing-related bubble went off?

Why is there this obsession with making people “home-owners”, foresaking decent economics in the process, even when those decent economics can steer you clear of a financial meltdown?

Buy all means, build more homes if there’s a market for them. That might curb prices and make a mortgage more economically viable. But when the government uses the banking/lending system as another tool for social engineering, you get, well, you know, what happened last time.

Some interesting views on this in the Backbencher, which is always well-worth a read.

Andy Jones TV Season 5 Episode 8

A viewer emails: “re the current economic situation, doesn’t it stand that if austerity (i.e. cuts) work and investment (i.e. growth) doesn’t, then why is America’s economy doing better than your country’s and Europe?”

Sorry all, but supply-side economics is a fact.

Most political pundits and many politicians (of all flavours) describe “supply-side” economics as “voodoo economics” or the ramblings of “delusional supply-side fantasists”. But there's one problem.Whenever we get the stats in, it appears that the rate at which governments tax us actually have an effect on our behaviour, and subsequently on the amount of money that winds its way back to the treasuries.

When the change is small (say an income tax increase from 35% to 37%) there is almost no negative Laffer curve effect. But when the change is large (say a 10% increase or decrease) then this will have a more pronounced effect on government income. This simple economic reality – dynamic scoring – has for a series of bizarre anti-intellectual reasons been ignored and even ridiculed.

Well we've had some more hard data about this economic reality. Aside from this excellent summary from journalist Janet Daley, we've no one seemed to mention this when the data came in around November time.

Gordon Brown raised taxes on the higher earners from 40% to 50%. The effect? Millionaires who were eligible to pay at that rate (based on what they declared to the taxman as income) have – quite within the law, fallen from 16,000 to 6,000. The government has an estimated £7-£9 billion in lost earnings:

It turns out that the introduction of the 50p rate of income tax caused two thirds of those earning over a million pounds per year to simply disappear from the reach of HM Revenue and Customs. Whereas, under the previous highest tax level of 40p in the pound, 16,000 people were prepared to declare earnings of one million, that number shrank to only 6,000 after Gordon Brown, bless him, introduced the higher rate. Result: the Treasury actually lost 7 billion pounds in revenue.

It would appear that due to the worsening economy, and the higher taxation level both incentivising ways of getting around paying income tax at all, and also incentivising entrepreneurs not to bother trying as hard, the government has shot itself in the foot.

That's the funny thing about this supply-side “voodoo economics” that can't possibly be real: it has a tendency to actually be very real indeed.

 

The “Anglo-Saxon” Approach was not to Blame for this Mess

My local MP John Redwood has, in four basic points, eviscerated the myth that laissez-faire light touch regulation (or the so-called “Anglo-Saxon Approach”) was responsible for the banking crisis:

1. The European banking system is in a worse mess than the UK or US systems today. There is no evidence that the EU, Spaniards, Italians, Greeks and Germans suddenly fell in love with “light touch Anglos Saxon regulation” and made the same mistake, yet they ended up with more weak banks.

2. The volume of regulations expanded substantialy during the build up of the boom. The EU came into the game and added many pages of new financial regulation at their level, on top of all the extra regulations the UK and US authorities were issuing. The UK was governed by a left of centre administration which believed in the efficacy of more regulation. The FSA reviewed all past banking regulation and added to it.

3. The authorities themselves were enthusiastic proponents of the easier credit they allowed under their myriad of new detailed regulations. In the US a Democrat President promoted more mortgages to people on low incomes as a social policy, which led directly to the junk loans which jeopardised the system later. They called the crisis the “sub prime” crisis in honour of the loans advanced by mortgage banks and by a couple of state financing arms that were fully nationalised in the crisis. The UK government ran up big bills paid for by off balance sheet transactions called PFI and PPP in the spirit of the lend more age.

4. The UK administration was particularly keen on promoting the growth of Northern Rock, a North Eastern company, and RBS,a Scottish company, as they grew very quickly. They took pride in the huge expansions of their balance sheets, and in the way they used off balance sheet vehicles to speed their growth. In the good days these were northern and Scottish companies showing London and the south how to run modern banking and financial services.

I wonder if we’ll ever be able to put this myth that laissez-faire is to blame to bed for good? Sadly, I doubt it…

A Single Income Tax?

Matthew Sinclair of the Taxpayers Alliance makes the case for it in the Wall Street Journal. I have to say, I really agree with him.

 

More Facts on Our So-Called “Cuts”

 

I’ve never come across Allister Heath before. He’s the editor of City A.M.

He’s written some really remarkable stuff, and it seems like I’ve got a lot of back-reading to do. But I wanted to share with you this great editors letter he wrote entitled “It’s austerity all right – but not of the kind we actually need“.