ABSENCE OF ECONOMIC REASONING, AND WHERE THAT LEADS

ECONOMIC PERSPECTIVES 136 - July 2023 | Emile Woolf

Do we need yet another “study” on productivity? We read that Chancellor Jeremy Hunt is about to launch the “most ambitious public sector productivity review ever”. He believes that finding out why the state is spending more for less will “put Britain on the path to lower taxes” and will pave the way for pre-election tax cuts. Government initiatives are always about buying votes, never about principled reform. It’s a pathetic waste of time anyway - government spending cannot possibly be the subject of productivity analysis because, by its nature, it’s not susceptible to economic measurement. Where there is no competition there is no pricing mechanism.

Public sector productivity is a contradiction in terms: the public sector’s chief purpose is to increase private sector productivity. Civil officials love using the word “productivity” because it sounds so industrious - but just plain “efficiency” would do nicely. We don’t need statistics to tell us when people paid out of taxes aren’t doing what they’re paid to do. It’s obvious: just break an axle when hitting a pothole, or try to book a doctor’s appointment, or renew a passport - or sit it out in the “call-queue” when you want to speak to a person rather than a bot. 

Our public administration is irremediably wedded to the idea that “more money” must be spent to fix our broken services - from healthcare to education to transport - without a thought to where this money is to come from. As C. Northcote Parkinson (of Parkinson’s Law renown) put it, if knighthoods were more likely to be won by saving money than by spending it, and all sums saved were to go solely towards reduction of the National Debt - that would indeed be “a good start”! 

More state spending is incompatible with economic growth

But an intrepid reformer of public finances would inevitably be faced  by “a closed phalanx of civil servants representing one of the strongest vested interests in the world”, to quote Parkinson. Our public servants’ addiction to unbridled spending has led our lame exchequer to push the UK tax burden to its highest level since the Second World War, missing the preferable remedy of higher growth - a solution that blessedly requires little more from government than to make it deliverable by removing obstacles - both bureaucratic and regulatory. There is no other way to reduce the level of debt as a percentage of GDP. Our National Audit Office has disclosed that there are 90 regulatory bodies in Britain that regulate about 45 pc of our private sector, costing it over £100 billion in compliance costs every year.

Ministers must be judged by what they do, not what they say. The Prime Minister, when Chancellor, made it more expensive to employ people by increasing National Insurance charges. He also raised the rate of corporation tax and introduced a “windfall” tax on the profits of energy companies that has caused them to stop investing. Harbour Energy, the largest North Sea energy producer, reports that last year’s tax bill ate up nearly all its profits. It has 1,500 people on its payroll in the UK, but is now shedding hundreds of jobs. The energy giant Total blames Sunak’s levy, an effective 75 per cent tax rate, for its decision to cut North Sea investment by £100 million. This tax was introduced as a “temporary levy” but last November he extended it to 2028. Britain maintains an irrational ban on fracking, which is widespread in the US and one of the main reasons why their gas bills are five times cheaper than ours.

Arbitrary taxation makes us all poorer

Conservatives once understood the elementary principle that arbitrary confiscation of profits leads to less investment and makes us all poorer. Sunak talks up the importance of markets and “economic freedom and prosperity”, yet he is advocating two of the most economically illiterate interventions ever: price controls on “basic” supermarket items and urging workers to accept wage restraint - mechanisms less likely to keep costs down and more likely to make basic goods unaffordable. Sunak’s economic myopia was evident in 2022 when he attacked Liz Truss’s proposed tax cuts, claiming instead that a tax hike was needed to beat inflation by reducing another Keynesian idol: “aggregate demand”.

Another interventionist craze uses discriminative tax policy to keep us healthy. Brewers now have a tax incentive to keep the price of beer down by reducing its alcohol content. Any brewer who brings the alcohol level down to 3.4%, far lower than almost any beer you will buy in a pub today, will get a 25p per litre tax break. As Tim Martin, owner of the Wetherspoons pub chain puts it: “the incredibly stupid reasoning is that people will drink less alcohol if they drink weak beer. But that's just not the way people are - they want proper-strength beers.”

Next phantom: a mortgage bail-out fund

You will wait in vain for an admission from the Bank that its dozen-plus years of mass money-printing and near-zero interest rates were the major contributor to the price-inflation spiral. The authorities, from the PM down, still can’t join up the dots: putting its monetary free-for-all into reverse necessitated the rise in rates that now engulfs the mortgage market. The economic illiterati now demand that government establishes a £3 billion mortgage bail-out fund with no thought for where the money will come from. “The government will provide” is the mantra that bedevils the nation’s thinking. Welcome to basket-case Britain!

Borrowers’ cries of anguish should be tempered by a reminder that interest rates today are no higher than the pre-financial crisis norm. But the national debt, at over 100pc of GDP, is almost three times bigger than in 2012. Where does Chancellor Hunt imagine the Treasury will find the money, at today’s rates, to pay the interest on that debt? No wonder he keeps saying “not yet” to his promised tax cuts. Yet middle-class welfare continues to absorb an ever-greater share of his budget:  over 5 million people of working-age consider it okay to be “economically inactive” (idle) while living on job-seeking benefits that require no proof of actual job-seeking - only your word! And don’t forget - even when in receipt of the job-seekers’ allowance you are also entitled to Universal Credit. Like ‘Ol Man River, the money jus’ keeps rolling along! 

No surprise that “benefit fraud” is rife, costing the state billions of pounds every year. More than 8,000 cases of falsifying bank accounts, faking injuries and illnesses have been investigated this year. Those found guilty of committing benefit fraud risk several consequences, including - would you believe? - being asked to pay back the money taken fraudulently, or even losing the benefit and being taken to court. Lockdown-induced phenomena like the 3-day week and working-from-home stem indirectly from state-indulged idleness. Worse: law-enforcement agencies languish and crime flourishes. Just look around our suburbs and streets. 

The museum of mad ideas

The idea of minimum wage comes straight out of the Stalinist copybook. When the state tells private businesses what to pay their employees you know how far we have advanced on Hayek’s “road to serfdom”. My colleague Professor Barron tells of a contract metal shop in North Carolina that has taken full advantage of AI technology by adding a robotic arm to its sheet metal-bending brake, and supervisors monitor everything on their smart phones. Lower-paid jobs have progressed from mundane loading/unloading to more skilled and better-paid setting-up and monitoring work. Since the highest job-turnover is with least-skilled jobs, these are the first the owner plans to automate, thereby escaping the minimum wage - which is actually a “selective employment tax” in disguise.

 As he puts it, no government can stop a development created by its own minimum-wage laws. His German colleague is president of a leading maker of grippers used in robotics and automation, and has the technology ready for multiple applications. When the $15 minimum wage is enforced it will make sense for restaurants to use automation instead of people, avoiding the hassle of hiring and training  - and the cost of bureaucratic compliance nonsense that goes with it.  

New circumstances require adaptability 

 When lockdown threatened the viability of small restaurants and hospitality venues, several transformed themselves into home delivery outlets, adapting themselves to new circumstances overnight. The notion that government can manage the economy is incompatible with  the freedom people need to engage in real-life economic activity - the only source of real growth.

The rise in interest rates causes pain for borrowers but is good for savers - a segment of society that has been severely punished for the past dozen years. If demands for state-aid for borrowers, whether by direct subsidy or mortgage interest tax relief, were to be granted, that extra money would have to be found - from where? Still higher taxes? Printing yet more money? It’s a circular route that culminates in even higher inflation - which is itself a tax that erodes everyone’s savings, reduces the purchasing power of salaries and makes us all poorer. 

The core problem today is psychological. The reality that is proving so hard to accept is that the era of free money had to end. Productivity-sapping zombie businesses, kept going only by state aid, are not viable in the post-furlough world; interest rates must normalise to eradicate inflation and allow savings to be properly rewarded. “’tis a consummation devoutly to be wished”, though not the one that Hamlet had in mind!

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[EMILE WOOLF, JULY 2023]