A Conservative victory - followed by a proper Brexit - opens the door to a radical reshaping of the economy: Mr Javid needs to borrow, in the national interest - and borrow lots for tax cuts and large increase in public spending. telegraph.co.uk/politics/2019/…
Time to release the brakes on UK PLC
UK will go to the polls in one of the most climactic general elections of modern times. It should allow the PM to move the parliamentary shenanigans that forced him to cancel his Nov 6 Budget and offer a radical prospectus for economic growth.
UK will go to the polls in one of the most climactic general elections of modern times. It should allow the PM to move the parliamentary shenanigans that forced him to cancel his Nov 6 Budget and offer a radical prospectus for economic growth.
Will PM and Chancellor realise that the combination of Con victory and a proper Brexit – along the lines of Boris’s deal – opens the door to a radical reshaping of the economy in which austerity is buried and there is great scope for tax cuts and extra public spending?
From OBR, IFS, FT or his own Treasury officials, Mr Javid will be fed a narrative that the economy will be slowed by Brexit, public finances will be running with red ink and you must continue with austerity to avoid government insolvency. These voices are wrong in numerous ways.
The economy will benefit from Brexit: new FTAs will bring down prices and stimulating productivity growth. There will be new scope for regulative flexibility, stimulating innovation where the EU has applied the precautionary principle or simply intervened in intrusive manner.
Our models suggest these gains, plus the simple ones from stopping our EU budget contributions and controlling unskilled immigration, will raise UK GDP by around 7% in the long run. This adds some 10% to government revenue as a result - around £80 billion in today’s money.
When we project the UK prospects forward to 2035, from present rates of borrowing we find that the Chancellor has scope by 2025 to spend an extra £65 billion a year in tax cuts or on public services and infrastructure;
and still hit ‘safe’ targets for debt/GDP of 60% by 2027. This assumes that the Bank has reversed its bond buying operations (‘Quantitative Easing’) and returned to monetary orthodoxy at normal interest rates.
But that brings me to the joker in today’s pack (a joker that none of the above august bodies pressing fiscal caution seem to have noticed). Monetary policy today has lost its potency, as we were reminded by the outgoing ECB Governor, Mario Draghi, recently.
With interest rates at zero, there is no real scope for bringing them down further. Printing money by QE drives up prices of financial assets, making life easy for govts and large corporations, and tough for savers and SMEs who struggle to get credit from tightly regulated banks.
Governments in particular are now being paid by markets to borrow, with interest rates adjusted for inflation actually negative. In short, monetary policy has become not just powerless but part of capitalism’s problem, subverting savings and competition.
The implications for fiscal policy shatter existing preconceptions: fiscal policy needs to be strongly expansionary, to drive interest rates back up to a normal region where monetary policy can be effective again.
The idea that the UK govt risks insolvency is absurd: markets are queueing up for its debt at negative real rates because it's very safe: the UK govt has never defaulted and is backed by taxpayers. What can be safer? Javid must borrow, in the national interest - and borrow lots.
With all these factors pushing the wind into his back, our projections suggest Javid could spend an additional £100 billion a year from 2025 quite safely, and move steadily towards this higher total.
The exact amount possible would need to be reviewed as we move ahead in light of the ongoing effects on interest rates. But it would be enough to pay for serious tax cuts and also a large increase in public spending.
With £100bn the PM could cut corporation tax by 10% (£32bn), abolish the very top additional 5% rate (£2bn), cut the top rate of income tax to 30% (£15bn). He could also cut the standard rate of income tax by 5% (£28bn), and spend £23bn on infrastructure and public services.
This gives a total tax cut of £77bn: a weighted avg tax cut across all incomes of about 15%, leaving £23bn extra (1% of GDP) for spending on public services & infrastructure. The breakdown above is political choice: Javid suggested he'd weight it more to the spending side.
According to Liverpool SSM of UK, every 1% off the avg tax rate gains 1% on GDP in the long run by making labour market more competitive. The 2nd round effects of Brexit through its Dividend would boost the economy by a further 15% over 2025-2015 (another 0.7%)
How should we evaluate the effects of the remaining extra spend on public services, here illustratively set at £23bn? We know that such spending also boosts growth by raising private productivity.
Let us assume that the government decides on these as opposed to the same in tax cuts if they judge they will have the same effects on growth; in this case this spending would also raise growth-in proportion to the tax cut programme, namely another 0.23% per annum.
On this basis we could project the whole post-Brexit programme from the Brexit Dividend could boost growth from 2025 by some 1% per annum. Oh to be Chancellor sitting in No 11 at this juncture in our nation’s fortunes!
