Friday, March 11, 2016

Fiscal Incredibility

Wonders never cease and Shadow Chancellor John McDonnell has been making some noises about a proposed "Fiscal Credibility Rule" which, if you believe them, sound almost sensible.

The trouble is, that is what's known as a "Spartan If."

McDonnell insists that a Labour government would eliminate the deficit on "current spending" and that Labour is not making a commitment to spend more money than the present government. He said:

"That means we are introducing a new fiscal credibility rule.

"First, that a Labour government will always balance day to day expenditure.

"Second, that we will only borrow for the long term, and that means for investment - investment in our infrastructure, in the homes that we need, the railways, the roads, the renewable energy.

"And in new technology to grow our economy.

"Third, debt will fall under a Labour government over a five year period."

There is a loophole there, in that borrowing "for investment" under Labour governments often means borrowing money on which the government - e.g. the you, the taxpayer - have to pay substantial interest for investments which do not generate a return. For a genuinely credible fiscal policy which delivers the "iron discipline" McDonnell is promising there has to be a limit to that.

But even with that proviso, what the shadow chancellor said would represent a considerable improvement in past Labour policy and a movement towards a more responsible policy - if I believed for one moment that he could deliver it.

The present government has not moved nearly as far as I would like towards balancing the books - as I am sure George Osborne would be the first to agree. But at least he has cut the deficit and nobody can accuse him of not trying to find more ways to cut it further.

But Labour has opposed every cut the government has brought forward.

How can Labour simultaneously expect anyone to believe both that they would not spend more on "day to day expenditure" than the present government, but also that their opposition to every economy in day to day expenditure which the government puts forward is anything more than childish political posturing?

If they're not going to spend more, and they oppose every economy which has been made. where are they going to save the money?

At the moment it is still official Labour party policy to renew Trident, although we know their leader would like to change that. Even if they did cancel Trident, they can only spend that money elsewhere once.

Are they going to raise taxes? If so, by how much and on who? And don't give us any rubbish about taxing the rich or cracking down on aggressive tax avoidance. The last Labour government got nowhere with that, the present government has tried far harder than Brown and Blair did to crack down on tax loopholes.

It's worth trying to get a simple tax regime with as few loopholes as possible and making sure that everyone pays it, but the idea that there is a magic wand called "cracking down on tax evasion and aggressive tax avoidance" which will magically transform the fiscal position is a fantasy and completely divorced from reality.

Once you raise income tax rates over about 40% you don't actually get any extra revenue - least of all from the very rich who are in the best position to move their income abroad or make use of elaborate, just-about-legal schemes to minimise their tax liability. The people who get hurt hardest if you try it are the very ones Ed Miliband called the "squeezed middle" and Labour say they want to appeal to.

Until Labour can show that they have truly grasped this nettle by making clear who and what they would tax, and by desisting from jumping on every "fight the cuts" or "end austerity" bandwagon going, they will not have a "Fiscal Credibility" rule.

They will have a  fiscal incredibility problem.


Jim said...

This is one of the few times there is really a simple answer that will solve the problem.

You see (in the simplest terms) the problem is the government can raise so much in taxes and things, but it's spending more than it can raise.

They cant raise more, because people wont pay it and will find ways to avoid doing so, so that is out. Therefore the simple answer, to balance the books I can give here is stop bloody spending it

Chris Whiteside said...

I agree with you - this is one of the few times there is an answer which can expressed relatively simply, and it is to not spend more than you can afford.

It is because Labour have not shown the least sign of developing the self-discipline to stop spending money like a drunken Santa that I do not find their promises of fiscal responsibility to be credible.