Liberty, Politics and Economics

The Economic Rape of Britain’s Youth

We should all feel sorry for Britain’s youth, not least because of the economic rape perpetrated on them by 13 years of Labour Government.

First, let’s be clear about the economic legacy left by the last Labour Government.  The deficit was a whopping £155,000,000,000 in one year!  This has now taken the debt to well over £1,000,000,000,000 that must be paid down by our children and grandchildren.

Whilst I have heard many Labour politicians responsible for this eye-watering number blame it on extra spending required to avert an “international financial crisis” created by bankers, the facts do not support this defence.

It was not a “world-wide” crisis as it affected only countries that ran up huge Government deficits (Greece and the UK being prime examples) or massive private deficits (Ireland).  This includes the US who refused to raise very low tax levels to meet spending obligations, and the EuroZone who cannot put taxes up any higher to match their totally out-of-control spending plans.  Many countries, including Canada, Australia, Saudi Arabia, China, Sweden Germany and much of South East Asia all avoided the worst of the crisis because their spending was more-or-less in line with their tax revenues.  Labour must take its share of the blame with the bankers, as it was them that ran up Government debt.

Also, Labour turned on the spending tap long before the 2008 – 09 financial crisis.

http://www.ifs.org.uk/bns/bn99.pdf (see Fig. 4.1 on page 10)

Labour spending went from 36% of GDP in 1999-2000 to 42% in 2005 -2006 whilst revenue was broadly flat at 37% of GDP over the same period.  Increasing Government deficits is not new and the size of this early deficit was not unusual by historical standards.  But the key difference here is that Labour increased spending and debt during the boom which started at the end of John Major’s Government.  We expect Governments to increase spending and deficits during a recession.  This is essential to cover increased unemployment benefits and lower tax revenues and smooth out the economic shocks that inevitably hit the most vulnerable citizens.  However, prudent Governments will then pay down debt during the boom times to allow more future borrowing when the economic cycle inevitable takes a turn for the worse.

Remember that the deficit is given as a percentage of GDP, which is much higher during a boom therefore the deficit is proportionally bigger.  Also, the last boom lasted for a long time, an unprecedented 16 years, allowing massive debt to build up if you were foolish enough to continue to borrow during this time.

The reason that Labour felt they could borrow with impunity, even during a boom, was it believed it had banished “boom and bust” economics.  Gordon Brown famously made this statement in the House of Commons. The world’s finances were linked for the first time by technology and Labour believed the massive global market could spread financial risks. Labour bet the country’s financial health on a belief that asset values would continue to rise, allowing borrowing against those assets.  Finally, Labour selfishly expected our disenfranchised children and grandchildren to pay back the debt sometime in the future, believing this was acceptable because it assumed the economy would be much bigger by then and they could afford it.  This is undemocratic and immoral.

Labour was wrong on all counts.  The connected global markets did not spread the risk, it spread the contagion, asset prices fell and the economy shrank increasing the debt to income burden.

Consequently, when the financial crisis hit in 2008 there was no more credit available, which left the UK economy unusually exposed.

Labour’s profligate and selfish policies will materially affect the lives of today’s youth.  They will already struggle to pay the massive pensions and healthcare bills of the much larger, soon-to-retire baby boomer generation (particularly as Gordon Brown also spent the money saved for their future pensions).  Britain’s youth must now also pay back their own University tuition fees and living expenses, something their parents got for free. To additionally pay back our eye-wateringly large trillion pound debt is surely beyond the pale?

Interestingly, Britain’s youth seem to have more sense than their parents, and have rumbled the cause of this economic catastrophe:

“Young Britons are classical liberals: as well as prizing social freedom, they believe in low taxes, limited welfare and personal responsibility.

and….

“Every successive generation is less collectivist than the last,” says Ben Page of Ipsos MORI, a pollster. All age groups are becoming more socially and economically liberal. But the young are ahead of the general trend. They have a more sceptical view of state transfers, even allowing for the general shift in attitudes”

See The Economist leader on this subject and the full article.

None of the old political parties match the political views of Britain’s youth.  They have a choice between illiberal (i.e. socialist) economics and liberal social policy (Labour) or liberal economics and illiberal social policy (Conservative).  Whilst valuing personal freedom Britain’s youth is fed up with collectivist, socialist economics .  They seem to think Boris Johnson has views most akin to their own.

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Liberty, Politics and Economics

Trade Unions Are An Anachronism

One has to ask what is the point of Unions in the context of all-powerful UK / EU employment laws?

The UK and EU offer such high protection to workers that it actively discourages employers taking on new staff, particularly full time staff. Higher unemployment (particularly youth unemployment) and a disproportionate number of part-time workers is a consequence.

The only added value of Union membership is to enable a certain minority of strategic workers to extort additional income from taxpayers and other workers with the threat of industrial action. This detrimentally skews the labour market causing major economic inefficiencies, which make us all worse off.  For example, because tube train drivers can economically ruin London with a damaging strike, they can extort extra income from other workers (fare-paying commuters and tax payers) and earn significantly more than hotel workers doing similarly skilled work.  London Underground staff are lavishly paid by public transport standards, with Tube drivers on basic pay of up to £52,000 ($85,000) by 2015.

They can also prevent the modernisation of an essential economic asset by insisting we have cash based ticketing offices in an era of cheaper automated vending machines and Oyster Cards that can be automatically topped up with cash online.  The Unions are also the reason we have drivers on tube trains in an era of cheaper, more reliable and safer driverless trains.   Transport for London faces a budget shortfall of nearly £80 million for 2013 and 2014. It cannot afford to ignore opportunities to cut costs and modernise for the sake of old-fashioned ticket offices or a confrontational union boss with a social agenda.

The final insult is that it locks away workers in out-dated and unproductive roles that could be doing something more economically useful.  Does anybody remember the Transport Unions forcing diesel trains to have a driver, guard and fireman? Anybody assuming moving to driverless train would cause unemployment should remember this era and swot up on the Lump of Labour Fallacy. Another example of a minority holding the majority to ransom is the National Union of Teachers ability to prevent the modernisation of our education system because a small minority of teachers can vote for strike action. We all vote for policies in general elections. Why should certain workers get an extra vote?

We have a new economic reality since Labour was last in power. Over a trillion pounds of debt, which is still rising due to an annual deficit of over 100 billion pounds. All this must be paid down. Combining this with an older population (with their large pension and healthcare needs) means we will have no more spare money for at least a generation. The UK must now earn what it wants to spend; it cannot continue to borrow what it wants to spend. Increased taxation can get nowhere near lowering the deficit, let alone the debt. Massive public spending cuts are inevitable.

To win the next election Labour must address one key question: Which party will best manage this new economic reality?

Labour must now convince the country that they can move from a party which financially supports in-work welfare benefit and uncontrolled public spending to one which puts financial prudence ahead of its social engineering experiments i.e. prudently manage the country’s massively reduced public spending capacity for the foreseeable future.

The Labour front bench may believe they can do this, but I doubt that their political paymasters (Unite and the GMB unions) will let them. They have a social agenda not an economic one. Unless Labour loosens the power of the Unions over its selection of leaders, MPs and policies the country will not trust them with its new, constrained economic reality.

I understand the important role played by Unions in securing workers rights in the latter part of the Industrial Revolution. But they have won the battle and served their purpose, which has been superseded by modern employment laws. They have become nothing more than a sinister anachronism, practiced in the art of blackmail and extortion on behalf of a tiny minority.

The Labour Party will have more credibility and electability without them.

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Politics and Economics

Why We Cannot Increase Taxes On The Rich

In the UK we have an annual £100,000,000,000 + deficit which is bloating our £1,400,000,000,000 + debt. The current interest payments are greater than the defence budget.

Remember in Britain more than half the adult population receive more in benefits than they pay in tax i.e. the majority are supported by a minority of tax payers – so the “rich” are already contributing.

Let’s try a thought experiment.  If we taxed everybody at 100% of his or her income we would collect very little tax.  Few people would work for no money.  If we set income tax at 0% we would collect no money. Therefore (logically) there is an optimum top tax rate whereby we collect the most tax.  Labour believed this was 40% for all but one month of their 13-year rule.  The current administration thinks it is 45%.  However all agree that taxing too much collects less tax.  We are just arguing about the correct percentage.

But can we squeeze the rich some more? A simple calculation:  Suppose we ask all people earning over £100,000 to pay an additional £30,000 tax per year on top of the tax they currently pay?  Totally ludicrous of course, as most earn little more than £100,000 and couldn’t find it, and those that earn significantly more (the one’s we all really want to tax) can easily move country and pay us no tax at all.  The constraints on incentives and resulting talent drain would make this whole concept fanciful as a way of raising revenue……but just for the sake of illustration let’s suppose it was possible…..

We have 500,000 people in the UK who earn more than £100,000 in salary (personal taxation, PAYE and Schedule D) so, best case scenario, we’ve raised £15 billion.  We’ve reduced the deficit from £105 billion per year to £90 billion per year.  Now what?

There are others who take their income in other ways e.g. company dividends, investments, trusts etc.   However these people are not tied to the UK by employment and can easily move to a more tax friendly country if the tax regime becomes punitive.  The recent experience of the socialist President Hollande of France in trying to raise significant tax from “the rich” shows that this is not practical.  He failed to raise any significant revenue.  Any increase in his take of tax was negated by a reduction in economic activity, as the incentives to do business in France were reduced, and rich citizens fled to Belgium, Switzerland and the UK.

Tax revenue will get nowhere near reducing the deficit, let alone the debt.  Micturition and hurricanes spring to mind.  Massive public spending cuts are inevitable.

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