The Budget: fiscal triangulation

triangulation_elefant1

Growth: The elephant in the room

 

Most political parties, including UKIP, agree that the UK needs to cut the budget deficit.  And to the extent that George Osborne’s new budget seeks to do that, he deserves half a cheer.  The main thrust of UKIP’s criticism is not that he’s cutting the deficit, but that there was no mention of the immigration issue which is causing massive wage compression at the bottom of the income scale, and damaging the living standards of unskilled and semi-skilled workers.   We also argue that while cuts are necessary, he’s cutting the wrong things — attacking the living tree while ignoring the dead wood.

But there’s also a fundamental misunderstanding out there amongst some of the old parties, especially Labour and the Lib-Dems.  They see the need to cut the deficit, but they regard that as a simple, binary, either-or proposition.  You can cut spending, or you can increase taxes.  Take your pick.  A billion pounds off spending?  Or a billion on taxes?  Simple choice.

Except that it’s not that simple, and it misses a third key factor: growth.  Economic growth has a massive impact on the fiscal position.  Higher growth, with higher incomes and more jobs, has a hugely positive effect on government revenues — to the extent that if we had sufficient growth, we wouldn’t need to cut spending at all.  We in UKIP believe that the best way to stimulate growth is to free British industry from the deadweight of EU membership, of EU regulation, and of EU energy policy.  But leave that aside for a moment.

Even as we stand within the EU, we have to take into account not just two factors but three – spending, taxation and growth.  And of course they interact together – you can’t change one without changing the others. Low growth forces higher welfare spending. But also – and this is the key point that Ed Balls and Danny Alexander entirely miss – higher taxes suppress growth.

So it isn’t a case of a billion pounds off spending or a billion on taxes.  Raise taxes, and growth falls.  So the billion you thought you had gained in taxation is partly off-set by loss of revenue resulting from loss of growth.  And taxation is a business of diminishing returns.  The higher the tax rates become, the more damage any further tax hikes will do.  It’s that Laffer Curve again — and in the view of many economists, we’re already perilously close to the point where tax rises fail to increase revenues at all — but succeed in punishing growth.

So Osborne is right to focus primarily on spending cuts, not taxation, to close the gap.  But that brings us to UKIP’s point: he’s cutting the wrong kind of spending.  Britain’s gross EU contributions are (round figures) £20 billion a year; net £10 billion.  When we leave the EU, we’ll probably save say £15 billion even after we’ve protected the things we’d want to do anyway, like farm support.  The government has ring-fenced 0.7% of GDP — around £13 billion — as foreign aid.  UKIP would keep a smaller aid budget primarily for disaster relief, but we could save say £10 billion.  By dropping the climate paranoia — and the green subsidies — we could make further massive savings.  And dropping HS2 would save a further £50 billion (maybe £80 billion allowing for over-runs).  A billion here, a billion there, and pretty soon you’re talking real money.

But the biggest point of all comes back to growth.  Outside the EU, outside the stultifying regulatory structures, and especially outside the EU’s energy policy, UK growth will be dramatically enhanced.  And growth will be the biggest contributor to deficit reduction.

Memo to George Osborne: by all means cut spending, George.  But cut the dead wood, not the living, growing tree.

Note: UKIP’s 2015 General Election Manifesto will be fully and professionally costed.

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18 Responses to The Budget: fiscal triangulation

  1. W*T H*L*B*T says:

    Reblogged this on Rnm101's Blog and commented:
    Makes to much sense for the Legacy Party’s to think of it.

  2. Jane Davies says:

    He can also recoup the billions of taxes that his big business buds are allowed to salt away into off shore accounts by closing the loopholes that allow them to do this.
    By the way, Roger, where is UKIP’s GE Manifesto? I have not heard anything about the plans regarding pensions especially the frozen pension scandal. The 4% who are victims of this injustice are waiting to see which party is going to do the right thing on this and thousands of us are registered to vote. My proxy is in place ready and waiting.

  3. The Wasp says:

    Roger one point that is frequently overlooked is that many of the E,U, laws are simply the E.U, promulgating rules made at U,N, level e,g, Basle banking rules and have to be observed even if we left the E.U. However it is true that should we leave the E.U. the U.K. would be able to take part in the negotiations which draw up the rules rather than be represented by the E.U. which frequently does not reflect the U.K. wishes.

  4. Ian Terry says:

    George could have taken a leaf out of this report and could have saved Billions.

    Renewable Energy: the most expensive domestic policy disaster in modern
    > British history
    > In a new report Central Planning with Market Features: how renewable
    > subsidies destroyed the UK electricity market, published Wednesday 18
    > March, Rupert Darwall shows that recent energy policy represents the
    > biggest expansion of state power since the nationalisations of the 1940s
    > and 1950s – and is on course to be the most expensive domestic policy
    > disaster in modern British history.

    [The 9-page report can be downloaded from
    > http://www.cps.org.uk/files/reports/original/150313101309-HowrenewablesubsidiesdestroyedtheUKelectricitymarket1.pdf
    > -G]

  5. Ex-expat Colin says:

    Going, going…almost gone (Humberside)
    KILLINGHOLME: GAS-FIRED POWER STATION NO LONGER ECONOMICAL
    http://www.thegwpf.com/killing-killingholme-gas-fired-power-station-no-longer-economical

    Sounds like the wonderful EU IT system (Land parcels junk) is a dying duck…oh, sidelined or perhaps literally biting the dust : Integrated Administration and Control System (IACS).

    A UK farmer said on BBC R4 this am that a kid with crayon could do better. All this Gov IT stuff beggars belief really and its one after the other for at least the last 25 yrs.

  6. Mike Stallard says:

    Roger – please do look on the EU Referendum blog. their point is convincingly made that the regulations from the EU are in fact regulations from international bodies which, by and large, we would have to observe anyway.
    The line there – which Ukip would do well to consider – is that we ought to take the Norway Option and join EFTA. (The Daily Telegraph modernised and prurient calls it the Norway Model!)

    • No No No!!!! Norway gets most of the problems and few of the (fairly trivial) benefits. We’d not solve the free movement problem, so why bother? We need to be an independent country, like other independent countries! Why is this simple concept so difficult to grasp?

      • Ex-expat Colin says:

        +200 Billion

      • Mika says:

        It is always easy to oversimplify.
        It seems to me that what we really want is to remain in the common market and to leave the United States of Europe.
        Also in any referendum, we need every help we can get in the teeth of LibLab/Com.
        Norway works. Anyone who has been there knows that. Just buy a cup of cofee there!
        And using the Norway Model, we can then start to negotiate.
        If we just see this as a matter of leaving we have to face the fact of breaking a Lisbon treaty which we have solemnly signed. We also have to face the fact that we will have to renegotiate our trade arrangements.
        To me, the heartbreak is the way that EUReferendum blog, Ukip and the Conservatives are all at loggerheads. I really wish you would all learn from each other: you are all right in your own ways!

  7. Brin Jenkins says:

    Mike if any organisation has International in its name I suspect problems. I think International Companies should be banned as their loyalties are often elsewhere. If we can make it here we should always do so. Costa Coffee and Mcdonald’s do nothing for our economy and never will.

    • Come on Brin! You can’t turn the World off. And you can’t turn the clock back. We’re a great global trading nation. You can’t start banning inter-national companies. Some of the best of them are British.

  8. Patryk says:

    I agree with green subsidies and smaller foreign aid, but you overlook some points:
    – much of the growth is enhanced through competitive migrant labour – UKIP’s policy would be catastrophic.
    -all symbolic savings you propose would not be enough. They would be offset by your spending commitments.
    – Tories are delivering and suggesting real changes on welfare – your party is quiet for fear of not offending its northern, pro-Labour base.

    • ian wragg says:

      What’s competitive about importing cheap unskilled foreign labour which increases GDP but reduces per capita.
      We then have to pay 1.8 million to do nothing and lots of this competitive migrant labour is claiming in work and other social benefits being a net drain on the exchequer.
      Immigration only benefits companies who can pay lower wages due to benefit top ups.

    • I disagree Patrick. UKIP knows we need immigration — but we don’t need unlimited unskilled economic (or welfare) migrants. And beside the savings I list, there’s the growth from deregulation. Just dropping EU energy policy would have dramatic results for competitiveness and jobs.

  9. Ex-expat Colin says:

    Mercedes Benz car orders from E. Europe expected to rise shortly kindness of a Tory idiot:

    Britain launches multi-million pound fund to help countries resist Russian intimidation
    http://www.express.co.uk/news/politics/565195/Cameron-announces-fund-help-countries-resist-Russian-intimidation

  10. Katie says:

    Read a letter here from someone in Scotland. No wonder they want to join the EU!!! Big bail out on the cards if the SNP get independence. All a complete waste of our money. Letter below as in the Scotsman newspaper.

    Power bills blow

    Peter Jones wrote an excellent article (Perspective, 17 March) on the
    consequences to the Scottish economy of full fiscal autonomy. However, what
    would be interesting would be an assessment of the consequences resulting
    from the costs of subsidising the renewable energy sector.

    Last year, Scottish Renewables stated that the sector received £2 billion
    in subsidies in 2012, when renewables generated 12 per cent of Scottish
    demand. Extrapolating this to the 100 per cent demand scheduled for 2020
    gives a subsidy bill of £16bn a year.

    Currently, 92 per cent of the annual subsidy is paid by English and Welsh
    consumers via the UK grid pricing structure. However, as your columnist
    Brian Wilson constantly reminds Scotsman readers, a ruling by the European
    Court of Justice decrees that Scotland cannot charge foreign consumers for
    the subsidy element of any electricity exported. This would result in the
    £16 billion subsidy being paid solely by Scottish consumers.

    Two million domestic consumers use 30 per cent of electricity in Scotland
    and so would face an additional cost of £2,400 a year on their bills. The
    budgets of public sector firms would drown in a deluge of red ink, whilst
    private firms would head for Carlisle or Berwick.

    It would appear that renewable subsidies would bankrupt the Scottish
    economy as the bill is four times that resulting from loss of Barnett
    formula income.

    ————————————————————————————————————-

    Whoopee! Living in Scotland and voting No in the independence referendum I can’t wait to be in debt and freeze to death!

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