Thursday, 1 December 2011

Rescue the economy - no income tax

The United Kingdom is in financial trouble. As a country we are spending more than we earn. Our government has to borrow money to be able to provide basic services. If your monthly income is £1,500 yet you spend on average £2,000 a month you will very soon get into serious financial trouble.

The old financial tools deployed by the UK Government to deal with this situation just do not work in the current global environment. They may try to stimulate the economy by reducing the bank interest rate. The idea being that lower interest rates encourage people to borrow more money and spend that on manufactured goods, thus promoting growth. The problem is that interest rates are already at a record low level and the real interest rates charged to the public remain stubbornly high. As the banks try to recover from the losses of their previous toxic debt (casino banking) scandal and also raise their reserves they have no incentive to reduce interest rates charged to customers. The other problem with stimulating growth through low interest rates is that people use the borrowed money to buy imported goods thus worsening the country's debt position.

The lower interest rates also discourages frugal people with spare money from long term savings. The is little point in saving if the actual deposit interest rate is lower than the rate of inflation. People see their savings better protected by investing in property. This gives no net gain in the national wealth and sees money sucked away from investment in UK industry. The Catch 22 with "investment" in property is that it only works by forcing up property prices. People borrow more money to pay these increased property prices, when there is an increase in the interest rate it will suck a massive amount of spending money from the economy to pay banks. In 1989 the base bank interest rate rose to 15%.

Another Government tactic is to print extra money. This is not money that has been earned or borrowed, it is merely a devaluation of the national currency. In effect it is debasement of the coinage or clipping silver from the coins. It is a technique usage for centuries when the rulers do not have enough income to meet expenditure. The current fashionable name for this is Quantitative Easing. The problem is that this reduces the value of the money held, in our Sterling currency, by overseas banks and investors. It is in effect a back door devaluation against other currencies. The problem is that devaluation increases the price of goods imported into this country. As we spend more on imports than we earn by exporting the effect is that we further increase the indebtedness of the UK by printing money. If anyone doubts the impact of a currency collapse look at the example of Argentina. Currency devaluation tends to increase interest rates as oversea depositors look to maintain the return on their loans to this country.

Over the past couple of decades businesses based in the UK have tried to reduce their operating costs by moving their production processes overseas. While this may reduce the monetary cost of the product it increases the amount of goods that we import. Moving production overseas also removes paid employment from UK employees. It means those ex-employees (and the companies on their behalf) no longer contribute to UK employment and national insurance taxation. Unless that employee can find another job he/she becomes a burden on the UK Government in terms of social benefit payments and reduced tax contribution. It also means that the individual surviving on social benefits is less likely to contribute to the UK economy by purchasing UK manufactured goods. The last Labour Government expanded the size of national and local government to create jobs, but this increases the national borrowing requirement to pay for the additional Government direct employees and outsourced employees.

At the end of the twentieth century the UK economy was bolstered by additional income from North Sea oil and gas, but that additional income source is rapidly diminishing. The United Kingdom needs to take some serious steps to rebalance its economy. We need to start earning a lot more than we spend. We have some massive debts to pay off. We cannot use the old tactic of inflation and devaluation, that would just increase the repayments on our existing massive debt.

We need to make imported goods less attractive to the UK population while at the same time make UK manufactured goods much more attractive. This would help to rebuild the UK manufacturing base as businesses are encouraged to produce locally. This can be achieved by applying a minimum 30% tax on any imported goods, food stuff, fuel, service, raw materials to this country. An import tax on food would also encourage farmers in this country to produce more food from their land, thus improving our food security. At present our food supply chain breaks down very quickly if imports are disrupted for any reason. With the prospects of global food prices increasing we need to encourage our farmers to produce more homegrown food.

To compensate for the increased price of goods in the shops we should at the same time alter the income tax bands so that the ordinary 95% of the population pay no income tax. There could still be taxation of the wealthy. Suitable balancing of the tax rates would mean there is effectively the same same life quality for the UK population, but just that there is a greater incentive to buy locally produced goods and less incentive to use imported goods. That would boost the incentive for businesses to manufacture in the UK thus improving the employment of people within the UK. As the employment situation improves the reducing demand on social benefits will follow, reducing the demands on the public purse.

No doubt many of the current politicians and economists will argue that using import taxes is a bad thing. However, those people have had their chance and failed. Their theories, maxims and economic models no longer work. It is time for a new direction. We should shrug off the colonial guilt of trying to stimulate the economies of overseas countries. They've had their start-up, we now need to look after ourselves and prevent an economic hangover for our children.

1 comment:

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