What happens when politicians, conservatives and liberals get together to make economic policy? a recipe for economic catastrophe!

Posted on September 1, 2010 by

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Written by Orphe P. Divounguy

In May 2010, something really odd happened: our “great” allies from the other side of the pond decided on a coalition government between a Conservative party, usually the party associated with lower spending/taxes, and the Liberal-Democrats that promised anything but fiscal adjustments.  The Conservatives promised to cut government spending, and the “Lib-Dems” promised to tax the rich, lower taxes on the poor but in fact made no promises about reducing out-of-control state spending.  Two parties so opposed in ideology forming a coalition completely took the rest of the world by surprise.  In fact Nick Clegg, the Deputy Prime Minister, leader of the Lib-Dems only changed his position on spending cuts during his negotiation process with David Cameron to form a coalition government (although I’m sure the Greek fiscal crisis helped bring a lot of politicians from a dreamy state of perpetual spending other people’s money back to a harsh reality  – ok maybe that was a bit of a cheap shot on my part).  Then again, can we trust politicians to stick to their guns if it means being on the losing side or the “not quite winning” side of an election?  Of course not!  If an alliance between heaven and hell is deemed necessary for parliamentary majority, so be it! (By the way which party represents heaven and which represents hell? Totally your choice! They’re all equally without a clue when it comes to economic policy)

The result of the coalition is nothing short of economic policy disaster!  This week, the Chief Secretary to the Treasury Danny Alexander (a Liberal Democrat), Chancellor of the Exchequer George Osborne’s deputy, told The Observer newspaper that total tax revenue will have to stay at current levels to put the country’s finances back on track:  “The tax burden is necessary as a significant contribution to getting the country’s finances in order, so it will have to stay at that level for quite some time. “  Chancellor of the Exchequer Osborne (conservative) also announced that he would ramp up taxation on goods and services:  “We need the tax revenues from the taxes we are putting up to help us reduce the deficit.”

Can someone join me in saying this high tax burden is unsustainable and will lead to little or no job creation if not destruction and higher unemployment?  Furthermore, high income earners have the luxury of taking all investment as well as consumption activity overseas, leaving lower earning “Brits” not only more likely to end up unemployed but also to bear the cost of the “deficit reduction programme” on their own.  How could higher taxes result in a fairer tax system when a higher tax burden will surely hurt the rich but the poor will get the worst of it?

Let’s revisit basic macroeconomics, surely higher taxes on income and consumption will discourage work and all other economic activity!  It doesn’t take a genius to start wondering whether fears of a looming recession are not well justified!

So now what? What would make economic sense to avoid another downturn?  My humble opinion: shrink the size of government by cutting spending and cutting taxes!   Lower taxes do promote productive behaviour such as investment and job creation.  Lower VAT coupled with higher disposable income will also boost consumer spending.  None of which can be done without first and foremost a commitment to shrink the size of government, to scale back regulatory control over producers and consumers and to give back free rein of the economy to the more efficient private sector!  Just a slow down in government spending coupled with tax cuts could go a long way in getting this economy moving again.  Instead they’ve increased the capital gains tax and also increased VAT! oh What a pity!

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