Tuesday, 22 November 2011

Supply and demand – the difference between Labour’s and the Tories’ economic strategies

A few days ago, Labour launched their Five-Point Plan for Jobs and Growth. It involves:
1. A £2 billion tax on bank bonuses to fund 100,000 jobs for young people
2. Bringing forward long-term investment projects
3. Reversing January's damaging VAT rise
4. A one year cut in VAT to 5% on home improvements
5. A one year national insurance tax break for every small firm that takes on extra workers.

Yesterday, the inimitable @MrJacHart – who is a great blogger and worth following – satirised it as:
1: Spend 2: Borrow 3: Spend More 4: Borrow More 5: Blame everyone else when it doesn't work
which is as hilarious as it is scurrilous!

Labour’s strategy – demand-led growth and why it will succeed
However – and I will deal with Mr Hart’s objection to borrowing below – one thing you have GOT to admit about Labour’s plan for growth and jobs is that it is a DEMAND-LED plan.

Labour sees the truth, that the economy is languishing because demand is falling. The more cuts, the more people tighten their belts, the more businesses suffer and fail, the more the economy languishes. It is the vicious ‘cycle of poverty’ being played out in our economy … (in Sedgefield) in our community.

And it is this that the Labour Plan is self-evidently trying to address.
The jobs for young people, the advance in investment programmes, the tax break for firms that take on more staff – these are all going to put wages in people’s pocket, wages which they will spend, wages that will increase demand and get the economy going.
And the cuts in VAT will put more money in consumers’ pockets – money which (especially if they are poor) they will go straight out and spend – with the concomitant stimulus to shops and businesses.

The Tory strategy – supply-led growth and why it can only fail
By contrast, the Tory plan is a ‘SUPPLY-LED’ plan.

The Tories, with justification – and, it has to be said, with the agreement of by far the majority of the British people – think that it is the deficit which is the main problem facing Britain today.
They are therefore taking steps to cut government spending, fully aware that this will reduce demand.

This is because their hope for economic growth does not lie in consumer demand, but in business enterprise.

The rich – the businessmen, the entrepreneurs, the City of London – are, in Tory thinking, the ‘wealth-creators’. To do anything which might drive them away would be a disaster (which is why Cameron opposes a ‘Robin-Hood tax’). Rather, we need to coax and cosset them, so that they can create wealth. It is the Tory hope that a revitalised and vibrant private sector will take up and compensate for the losses in public sector jobs.

Much of the Tory economic strategy, therefore, is to do just that. How do we encourage forms to invest, expand and employ more people – we reduce corporation tax. How do we persuade the energy companies to build £billions-worth of new generating equipment – by giving them a deal which allows them to charge huge subsidies to the consumers. Allowing private firms into the NHS market, selling the nationalised banks at a huge loss, freeing up planning restrictions. Etc. Etc.
Unsurprisingly, the CBI LOVE this approach, and are lobbying the government for MORE incentives. You can expect presently further initiatives to ‘cut red tape’ (i.e. erode workers’ rights) and undermine the minimum wage.
The idea is that, by offering companies incentives and freedoms, they will respond by expanding ... and taking on more workers.

The problem is, however, of course, is that it palpably isn’t working. The economy continues to languish. All those incentives … and no growth. What could be going wrong?

The reason, of course, lies in the nature of capitalism.
Private firms do not exist to benefit the community. They are not there to provide jobs, or boost the economy. They are there to make profit!
So all the evidence suggests that Small and Medium Enterprises are using the reduction in corporation tax, not to expand, but simply to beef up their bank balances. The energy companies have increased their prices and profits to the point where it has become a national scandal. And when it comes to making deals with the government, the private sector is brilliant at making absolute monkeys out of the civil servants and laughing all the way to the shareholders’ meeting.

I do not blame the companies for this. I blame a government which was so unaware of the nature of capitalism that it put its faith in supply-led economic growth.
It can never work.

Demand-led, debt-free growth
Let’s return to Mr Hart’s lampoon of Labour’s Plan for Growth and Jobs.
Yes, it’s hilarious – but is it true? Is Labour’s Plan no more than a borrow-and-spend disaster?
Answer: to a degree, yes. Proposals 2-4 ARE non-funded.
And in this I completely support Mr Hart; we MUST stop borrowing.

But we have to stop borrowing without damaging demand because – as we have seen – demand-led growth is the only way to boost the economy. (Supply-led growth is not a viable option.)
And to do this without damaging spending and demand, we need to find a way to increase our income, rather than decrease our expenditure.

As anyone who reads my blog knows, I think we need to start TAXING – taxing the rich (so well done Labour on proposal 1).

The ‘wealth-creators’ need to be made to understand that, if they hand over appropriate amounts of tax, it will not damage them! If we put those taxes into the pockets of – especially, poor – people, those people will just go straight out and SPEND that money … buying goods from the very same companies that handed over the tax!!!
So taxes INCREASE company turnover, and pre-tax profits.
And we all gain.

Right-wing commentators on the current 'austerity' budgets often draw parallels between today and the post-1945 period, when Britain similarly was faced with huge, seemingly impossible debts. I suppose it is the shared concept 'austerity' which attracts them.
But what they usually fail to point out is that in 1945, Britain had a FAR higher rate of tax than today. In 1944, the introduction of PAYE had extended tax to many more of the population. Income tax in 1945 was 45%, and surtax (on incomes over £2000) was 52.5%. Compare that to today, with a base rate of 20% and rich people going mad about a 50% higher rate on incomes over £150,000.

Perhaps the difference is that, after the war, there was much more a sense that 'we are all in this together'.
Today it's just a soundbite.

1 comment:

  1. And it's started already - the very next day!