A former Soviet Republic and the once-Socialist Sweden get it right on economics. They will save their young form decades of economic malaise. It might even prevent a lost decade…do read on O Blogmocrateers! Its a tale from our long ago re-released for the Estonian and Swedish audiences:
It may be a little early for Christmas songs, but we still packed in about 160 Spectator readers to our carol service on Wednesday night. It was held in St Bride’s, Fleet St, an immaculate Wren church filled with the sound of perhaps the best choir in London. As we milled around at the back afterwards, with the warm cider and mince pies, I noticed a board where parishioners had anonymously written their intentions. At the top was a prayer you wouldn’t have seen five years ago. “Pray for my son to find a job,” it said. “Please.”
A million other mothers will be making the same plea this Christmas, and there was precious little in George Osborne’s Autumn Statement on Wednesday to hearten them. The Chancellor’s political positioning was deft, as ever. But the economic outlook contained in his forecasts is dire. Britain has now been plunged into a Japanese-style “lost decade”; the average wage in 2018 will be the same as in 2008. And that’s if all goes as planned. Even these figures don’t account for the worst of it: youth unemployment is at a scandalous 963,000. It is becoming a national emergency.
Yet there was no real feeling of emergency, or even urgency, in the Chancellor’s statement. Osborne often behaves as if he is playing a game of chess with Ed Balls rather than trying to save a country. The policies in his mini-Budget – lifting the tax threshold, a tough welfare settlement, cancelling the 3p fuel duty rise – were all astute political moves. The Liberal Democrats will boast about their manifesto going into “people’s back pockets”. Mr Balls will be tricked into voting for benefits going up faster than wages, unpopular with his target voters. So politically, the mini-Budget was a roaring success. But economically, it made almost no difference.
It is said that the greatest trick the devil ever pulled was convincing people he did not exist. In the same way, the greatest trick Gordon Brown ever pulled was convincing George Osborne that economic alternatives do not exist. The four key points of Osborne’s plan are slow-motion deficit reduction, mild spending cuts (averaging about 2.5 per cent a year), a 60 per cent surge in the national debt and printing money to lower artificially the cost of all this debt. Each of these points was in Brown’s re-election plan. Osborne is borrowing just as much, but with a heavier heart.
This plan was never going to work under Brown, and it’s not really working under Osborne. He has been tinkering, and his changes are mostly all welcome. But even his own Office for Budget Responsibility judges that none of his Budgets have significantly improved the economic outlook. Voters, of course, don’t need statistics. This is evident from the 130,000 users of the food banks now scattered across Britain to the prayers stuck in church halls. A new plan is needed. And although the Chancellor speaks about being at the mercy of international affairs, he has more options than perhaps he realises.
Take Estonia, a tiny country at the mercy of its much larger neighbours, which has ample reason to blame “global forces”. But throughout the crash, it defiantly kept its taxes low (at a 21 per cent flat rate) and took the tough decision to cut state spending by a tenth. It is now celebrating the fastest growth in Europe. The much-larger Sweden responded to the crash with a permanent tax cut for the low-paid. This encouraged so many people back to work that the extra revenue covered the cost of the policy. Socialist Sweden has proven the existence of a phenomenon that the Tories had been taught no longer exists: a self-financing tax cut.
The more we learn about America’s recovery, the more the Keynesian analysis (demand is the problem, spending is the solution) is being disproven. A recent University of Chicago analysis suggests that most American job losses are accounted for by the change in relationship between taxes and welfare. From Tampa to Tallinn, a new thesis is being etched out: high taxes are retarding the recovery. Austerity, when combined with high taxes, will not help. But if you rebalance things in favour of job creation and work, magical things can happen.
This is what Osborne should have said in his Autumn Statement: that the Conservatives are the new workers’ party, so every penny taken from welfare payments will be used for encouraging work and cutting the taxes of the low-paid. Iain Duncan Smith is working on overhauling the benefits system, but this will take the best part of a decade. Measures like the (welcome) corporation tax cut will come in 2014, but young lives are being wasted right now. So an emergency package is needed to address this.
The Treasury, of course, has an institutional bias against new ideas. Its officials are at their happiest dreaming up wheezes like the pasty tax and reject what John F Kennedy once described as the great “paradoxical truth” – that lower rates can mean more revenue. I understand that ministers had been looking at another continental pro-growth idea: German-style mini jobs where anyone can take any number of £400-a-month contracts tax-free. But this seems to have been left on the cutting-room floor. The Treasury still seems to prefer reforms which sound radical, but aren’t.
For example: it’s all very well to increase the tax allowance and say (as Nick Clegg did) that it will benefit 20 million people. But given that the tax cut amounts to 90p a week, it is not clear what these workers will go out and buy in celebration.
When the Swedes cut tax for the low-paid, they made it amount to an extra month’s salary a year. When they cut corporation tax, from 26p to 22p, they did it in three months – not phased in over half a decade, as Britain is doing. Tax cuts need to be sharp, noticeable and immediate. Any tax cut worth its salt will contain an element of risk.
This should be the perfect coalition mission: tax cuts for the lowest-paid would be true to the spirit of the Lib Dem manifesto. The easiest way of financing it would be to lower the new annual benefits cap, currently at £26,000 per person. But there are all too many savings to be made in a government machine whose spending, even now, is just 2.7 per cent below its peak.
The mini-jobs proposal (tax-free for employers, too) would be in the same vein. The minimum wage for the under-25s could be lowered, creating more entry-level jobs. The policies don’t matter as much as a new guiding principle: to move financial support away from welfare and towards work. And place this, not hawking cheap debt, at the heart of the Government’s growth strategy.
Osborne recently observed that Barack Obama was re-elected after years of dismal economic progress, because he succeeded in blaming the other guys for the problems. His implication was that the Conservatives might get away with doing the same in 2015.
But there is another option: to achieve economic success, and then promise more if re-elected. There are four months to go to the next Budget, which may be the Chancellor’s last chance actually to make a dent in the economic trajectory he inherited. He should be optimistic about his chances of doing so. If Estonia can overcome a sense of economic fatalism, then Britain can too.