A couple of people have messaged me to ask for my thoughts on the economic situation, taxation and the weekend Inheritance Tax row. I have already posted previously on the economic situation but it seems to be constantly deteriorating and the Government continues to thrash around with no real idea what to do. In the mean time Labour are building up a debt burden unprecedented in peacetime or war. I was reading today that the budget deficit could reach as much as £180bn or 12% of GDP next year. The total burden of debt will continue to rapidly escalate after that as the shortfalls in taxation receipts and the increased expenditure on benefits payments resulting from soaring unemployment, combine in a toxic combination.
The Government’s solution has been to cut VAT, pour money into the banking system to prop up banks, and to effectively print money. Each of those measures in my view is wrong headed. The VAT cut was a complete waste of money, coming at a time of up to “75% off” sales in shops and in some cases was not even passed on to consumers. For example, my monthly bill from Virgin Media has not changed despite the VAT cut and the bill saying that “VAT is applied at the correct rate”.
Pouring money into the banks was like pouring money into a bucket riddled with holes. A lot of the banks’ bad debts are overseas and therefore a large amount of the money has leaked abroad. Far better in my view to have allowed one or more of the big banks to have gone bust, whilst providing a comprehensive deposit guarantee scheme for British-based personal and business depositors. This would certainly have been very much cheaper than the banking bail-outs so far.
Let us also not forget that the Lloyds / HBOS merger was dreamed up in Downing Street; something that the Government was keen to trumpet when it looked like the merger would save HBOS. Now that HBOS is a mill-stone around Lloyds’ neck, they would like us to forget that fact.
Printing money (or “quantitive easing”) is also the last refuge of a collapsing economy. It is the kind of measure adopted by Weimar Germany or Zimbabwe. I remain of the view that this policy is storing up inflationary pressures which will be very difficult and painful to address, once the immediate problem of deflation has passed.
In the light of all this, what could the Government have done? This is summarised very effectively on the Conservative.com Economic policy page. I suggest that those people who say that the Conservative party has no polices or would do nothing, read the policy document that is linked at the bottom of the page. These are the policies that would really get the economy moving again and at a fraction of the cost of the failed Brown/Darling measures.
With regards to Inheritance Tax, there is no doubt that Ken Clarke spoke slightly “off message” at the weekend. The raising of Inheritance Tax thresholds so that only millionaires pay the tax is a pledge not an aspiration and the Conservative Party has immediately clarified that once again. In a way the policy is less important now that house prices have fallen from their peak and the Government has made its own pledge to increase the threshold to £700k from 2010. However, a promise is a promise and I think that ironically the Conservative Party will benefit from the slight confusion resulting from Ken’s comments. Firstly, because it reminds people that Ken Clarke is back in the Shadow Cabinet and secondly because it will remind people that it was a Conservative promise that estates under £1m would be taken out of this hated tax.
The next Government is going to face a monumental task getting the public finances back into shape. Yet again it is likely that a Conservative Government will have to clear up an economic mess left by Labour. Public expenditure will come under intense scrutiny and taxes in general will have to rise, initially at least, just to balance the books. However, as the economy recovers the Government will see its revenues increase again and it will be able to sell off the public stake in the banking sector. Done in tranches in a growing economy this should raise considerable revenue, just as the privatisations of the 1980’s did.
I hope that a Conservative Government will simplify the tax system after 11 years of it becoming more and more complicated. It should prove possible to close tax loopholes and remove complicated reliefs while cutting headline rates of tax and offering targeted tax cuts in some areas. At the same time I would raise tax on some things like tobacco, alcohol and non-recyclable goods.
We have to accept that overall taxes are likely to have to rise in the early years of a Conservative Government but our aim should be to greatly simplify the tax system and make the UK a premium destination for overseas investment. This should go hand in hand with improved over-sight of the financial sector and at least a partial reversal of Gordon Brown’s changes to the regulation of the financial services sector.
This weekend I joined a team to do some door knocking in my own ward. This was the first time I personally had been door knocking this year, although other colleagues have been out around Reading for the last few weeks. We got a very positive reception from most people, who seemed pleased to see us around when there was not an election on.
As might be expected, I picked up a few issues that I will take up with the Council on behalf of local residents. What was less expected was the number of people volunteering the news that they would be voting Conservative. Until a few years ago my ward was a Lib Dem strong hold but they have faded away in the last few years as they lost their Council foothold there. Interestingly, of the people I spoke to (admittedly a small sample) the number of stated Labour supporters outnumbered Lib Dems.
There was some real anger at the economic situation and at yet another increase in Council Tax amongst a number but generally people were content, with no particular issues to raise.
I look forward to the next session.