[No, but seriously guys] The Economy.

I haven’t written much about the new government. The problem they’ve presented me with is that although the last incumbents were horrifyingly awful they were at least a comedy goldmine and in terms of sheer laughs Brown, Prescott, Blair, Blunkett and pals were just the gift which kept on giving, so with the recently election we’ve gone from having Barry Chuckle in charge of the economy to someone who appears to actually understand the use of a calculator and the guffaws have dried up somewhat as a result.
Anyway, I was on the way home from work the other night when I saw Vince Cable go past in his ministerial car. It’s one of those London moments when you become aware that you’re close to the heart of government and the world is busily going on around you – I don’t expect people living in Edinburgh get the same, if any, thrill from seeing Alex Salmond – and it also got me thinking.
Vince looked his usual grim self. I used to think that his expression was an indicator of how well the coalition government was going, but I’ve changed my mind now and just think that he pulled his worried face one afternoon and the wind changed. I don’t know where he was zooming off to, but he certainly looked jolly serious about it; presumably he had his metaphorical mop and bucket in the back of the car with him and was off to clear up a tiny bit more of Gordon’s Mess.

I’d been talking to clients earlier in the day and the dreaded words double-dip came up. The idea that the any recovery might be short-lived and the UK economy will slip back I to recession. For my part, I think any signs of growth have been massaged and we never came out of recession in the first place. Any suggestion that we did was a useful political fiction for all concerned because if it hadn’t then whoever was in government would have had no choice but to admit it was definitely, absolutely a depression – and that wouldn’t help things at all.

For me, the big fear before Browns inevitable defenestration at the election was George Osbourne. The Conservatives had kept him in a cupboard for the two years previous and the only conclusion I could draw from that was that he was such a colossal liability that they didn’t dare let him out. In this I’ve been subsequently surprised, or perhaps relieved, in that he’s thus far been not utterly hopeless and so several orders of magnitude better than his recent predecessors. Certainly the budget sent the right sort of messages to the global economy and forestalled the Chinese from calling in our debt for the time being, which was what was needed at the time, but for Osbourne, Cable and their various gnomes attached the treasury the work really has only just begun.

There’s something I tend to boast about. Back in 2005, way back when The Guardian was describing Gordon Brown as “Economically Aware and Business Friendly” and there was a legion of his cheerleaders on LJ only too willing to shout me down, I predicted the crash for pretty much the reasons it ultimately happened. Although in retrospect I’d rather have been wrong, I’m pleased I did because seeing it coming allowed me to make provision by clearing all my personal debt and essentially putting my head down to wait for the bang - and the unrealistic overconfidence in my own economic abilities which that prediction gave me meant I got to thinking about the economic hole we’re in, and what might be done to overcome it.

If you read the usual commentators on the economy, the left wing ones are calling for bigger taxes on the rich and the banks, and the right wing ones are calling for a slash and burn policy on the public sector as if either of those courses of action are some kind of magic bullet which will make the future a bright and glowy one for all concerned. Of course, it’s that sort of economic short-termism on both sides which let the crash happen in the first place. For the taxing the evil rich and bankers crowd, the big problem with their idea is that it just doesn’t seem to be possible. By way of example, no UK government has ever managed to raise more than about 40% of GDP in tax. Even in the high-tax-happy days of the 95% tax rate the take never once inched over that magic 40% rate, and by rights Gordon’s taxation system should have generated 43% but never got anywhere close to that number as it just becomes more costly than it generates to enforce tax rates over a certain level. This is especially a problem as we’re currently taking 40% of GDP in tax and spending 49%, which is about as unsustainable as it gets without turning into Zimbabwe.
On the other hand, slashing the public sector is only possible to a certain point; Cameron has denied that his ‘Big Society’ is a method of telling people there’s no money. In truth, it doesn’t matter if it is or not as there isn’t any money and there’s no more forthcoming whatever the truth is. Moreover, just to get back within our means will entail 20% lower government spending and the trimming in the most recent budget is just that – trimming.

The biggest problem is that the Elephant in the room isn’t being addressed – sorry guys, but the welfare state is rapidly becoming unaffordable. It was a great idea when the wealth of three continents was pouring into the treasury, everyone died pronto at 65 and there were only 4 people unemployed in the whole country, but these days it has become unsustainable. Right now we’re paying something like 6.5 million people to sit round doing nothing at a cost of getting on for a hundred and fifty billion quid a year, and the options for changing that are slim: employing them in the public sector just reduces the treasury reserves even faster. Keynesian stimuli during a downturn is a fantastic idea but it is predicated on running up a surplus when times are good, which is something that spectacularly failed to happen and that means the resources for spending our way out of trouble are limited to say the least.
The big problem is one which was predicted by Freidrich Hayek more than fifty years ago – combined a welfare system with open immigration and you sow the seeds of your own destruction, as welfare provision in one place is always going to be more generous than working conditions in another and this will result in skilled migrant labour and a rise in the numbers supported on the welfare system. Add to this a minimum wage which effectively makes it illegal to employ anyone whose work is worth less than £6.20 an hour and you end up in an economic hole and a rise in Nationalistic politics by people who blame immigrants for their being on the dole - say hallo to the BNP and their one million votes in the last election.
All that the above results in is the people whose work isn’t worth very much either being unemployed or employed in the public sector, where paying people more than their work is actually worth can be better hidden right up until the economy hits the buffers.
What needs to happen is to get those people on benefits off them and into the private sector and fast, but the chance of doing that is limited as well…

Reducing the state take of the economy to stimulate private sector employment is the preferred solution of the right and probably stands the best chance of getting us out of the hole, but there seems to be a considerable amount of willful blindness about the scale of the budget deficit and just how much it is possible to lower taxes without defaulting on the debt. Cutting Employers NI payments and Corporation tax sent a nice message, but it was a drop in the ocean and doing more than that simply isn’t possible.

This is the problem which faces the coalition; the choice between the devil and the deep blue sea. Raise taxes and stifle real recovery rather than make-believe government stimuli which just postpones the problem and makes it ultimately worse, or cut public spending hard and risk civil disorder. I expect George Osbourne and Vince Cable to age very badly over the next five years. I don’t envy them. More later.