In this column last week I acknowledged that the sheer level of ambition of the Chancellor’s ‘fiscal event’ might spook what John Maynard Keynes called the ‘animal spirits’ of the markets. Well, it certainly did, though calm has now returned, for the present at least. As I write Sterling is trading at a better rate than it was before the Chancellors statement. The reality is that Sterling has been falling throughout the year, together with so many other currencies, losing 20% of its value against the US Dollar, which is about the same as the Euro has lost. It has rather a lot to do with the virility of the Federal Reserve’s response to inflation, something that the Bank of England might learn from.
In the midst of the criticisms of the Chancellor’s plans, the International Monetary Fund piped up with its own critique. This is the Same IMF that denounced George Osborne’s spending cuts in 2011, telling us that they would result in mass unemployment. It didn’t, on the contrary, we achieved record low unemployment. Last week the IMF’s commentary was about our tax proposals giving rise to greater levels of inequality. If I recall correctly my days as an economist, income distribution is measured by the gini coefficient, and UK has one of the most even distributions amongst developed countries.
Our problem really isn’t to do with the lack of equality, it is lack of economic growth. It is exactly this that the tax proposals are designed to address. Equally important is the need to raise more tax revenue through that economic growth. Given that fully one quarter of all our income tax revenue is raised from the top one percent of tax-payers, it is precisely this top one percent that we most need to encourage to maximise their initiative, enterprise and effort in order that, by paying a lower rate of tax individually, they pay even more tax collectively.
Parliament has been in recess since the very day that the Chancellor made his statement in the Commons. As a consequence, the only plotting of which I am aware is what I’ve seen reported in the news media. Frankly, I’m pretty sceptical about these stories of Tories conniving with Labour to defeat the tax proposals. Rarely does anything turn out to be quite as reported. Were it to be true however, any such plotters should remember that voting against a budget measure is a confidence matter, which should properly be repaid by withdrawal of the party whip. They should be warned.