Osborne; Gliding Down The Dark Side of the Laffer Curve

George Osborne gives his Autumn statement today in which he is likely to give us the good news that UK public sector net debt in Sept 2011 was £966.8 billion, equivalent to 62.6 per cent of GDP. This excludes financial sector intervention.

If we include all financial sector intervention is included (e.g. Royal Bank of Scotland, Lloyds), the Net debt was £2266.3 billion (148.0 per cent of GDP).

That gives us a hefty interest bill this year of £48.6 bn (3% of GDP).

He is also likely to tell us that his original plan of tax rises and cost cutting to take us to salvation has taken the trajectory which, on a plane, would see the oxygen masks falling and the passengers donning life jackets. This is because there was a fundamental flaw in the plan and that was, (in the words of Black Adder), the plan was bollocks.

Government cost cutting has been insipid and half hearted. A sense of urgency has been lacking from the very start and as we've discussed on multiple occasions, what should have been a brutal but cathartic exercise in descaling government has been diluted many times over by political dogma and a failure of political courage. Instead of amputation, we're slowly bleeding to death. I expected entire government departments that are surplus to requirement to be axed; instead, the services have faced a vicious scythe and precious little else. 

Having dodged the early opportunity for which the electorate might have forgiven the government, Osborne, pushed along by the Liberals, resorted to draconian tax increases which are strangling the consumer and therefore the economy. It's all very well Vince Cable, possibly the most inept individual ever to walk down Whitehall, taking a "tax them till they squeal," approach but here's a newsflash Vince; the poor don't pay any more and nor do the very rich. The middle class, the spending engine of the economy, are on their knees. A real rate in the order of 60% is the financial equivalent of euthanasia.

Some may contend that high rates of taxation are bad for entrepreneurs. Nothing could be further from the truth. Every week I meet people who are setting up their own businesses and becoming self employed. Only, they're not employing anyone, they're mostly doing the same job but switching from PAYE and halving their tax rate in the process. Actually, it's madness not to.

This is an example of the Laffer Curve at work. So George, I reckon you're well past the optimal point of taxation, the point of equilibrium, and you're gliding down the other side.

 

If today all we hear about is help for small business then you're missing the point; you're treating the symptom not the cause. 

A brave man would slash the higher rate, all the way to 35%. A genius would introduce a flat rate for all of 20% on a six month trial basis. Inward investment would turn into a deluge, Europeans would head here by the planeload, businesses would flower and people would spend. 

This is important because the level of debt in itself is not the big problem, (it's was very much higher in post war Britain); it's an abscence of a commensurate level of growth which is killing us.

Moreover, there is one more important point to make. Europe is in disarray. Germany took full advantage of our industrial problems in the sixties and seventies to move into and exploit our tradtional markets. We now have a generational opportunity now to restore the economic balance against our competitors. If we only stand off and rely on falling tax receipts and marginal spending cuts we risk being dragged down with the rest of them.