Not a Review of the Autumn Statement

Treasury statements, whether of the Budget or Autumn Statement variety, are so full of detail and minutiae and political misdirection that it’s difficult to make sense of them. And I don’t propose to start now.

But if one thing is clear, it’s that almost nothing upsets a politician more than low tax revenue. Apart from personal scandal, of course; although we seem to be free of that sort of thing, for now.

Low tax revenue means not enough money for politicians and their projects, and oh how they love their projects and schemes. Without them they feel uncomfortable and impotent, no matter how useful they are to the public that pays for them.

While there is something appealing in the concept of impotent politicians, it’s not in their nature to leave things alone. There’s always a problem, and it’s a problem, as luck would have it, for which they have the unique competence to solve. They didn’t go to all that effort to get elected in order to not do things in Westminster; and that includes many on the Right. They do, however, realise that tax revenue is dependent on economic activity; more activity means more things to tax. And, when we consider the extent of the deficit, we know we need more of it.

But how?

While a certain sort of grabbing politician sees an increase in tax as a moral good in its own right, they are obliquely aware that taxes can have a negative effect on demand. They ignore the problem, however, by exhuming John Maynard Keynes, the economist, and claiming that demand is best encouraged by governments spending stimulus-money. The circuitous nature of the argument is lost on them, but it is fortuitous that the moral imperative for governments to spend money legitimizes yet more taxation.

But there comes a time when people will not accept ever-increasing levels of taxation. When that happens, and when they realise that targeting the rich doesn’t raise the revenue they imagine, politicians fall on the second method of raising tax revenue: growth.

Growth is now the watchword because that is the second side of the spending-reduction coin. While deficits are reduced by converging the spending and revenue lines, the democratic system prefers, for obvious reasons, to increase spending even if revenues are concurrently decreasing. And in the face of sluggish tax receipts, growth is the most favoured way out of the predicament. Growth increases the size of the pie, and thus the size of each slice, which in this instance refers to the tax take; get growth, get more tax.

Yet none of this answers the question of how we get growth; where does it come from, and is there anything governments can do to encourage it? Again, this seems to depend on your political and economic perspective. On the one hand, there are those that see demand as the key to growth, arguing for government intervention to get money flowing and people spending. Yet on the other, there are those that see supply as the key to growth, who are less taken with monetary stimulus, preferring to concentrate on measures like deregulation and tax reduction.

This last measure, ironically, has a positive effect on demand as well as supply. While firms have more money to invest and reduce their costs, thus improving competitiveness, people also have more money to spend. Both demand and supply are helped. The stumbling block, however, is the short-term reduction in revenue and the worry that increased economic activity will not cover the new gap between spending and revenue caused by the new tax cuts.

But that is another issue. Politicians are now mostly arguing for growth, despite lingering calls for the rich to bear an even ‘fairer’ burden. Though it’s not clear that anyone has worked out when an acceptable level of fairness is reached. Politicians now seem to realise that the best way to raise tax revenue is to increase the size of the pie, which is good because tax increases are mostly counter-productive. No doubt this is why the Autumn Statement has just ruled out the so-called Mansion Tax.

It’s interesting, however, that Budgets and Autumn Statements no longer seem to be statements on budgets alone (if that was ever the case), but overarching statements on economic management. How easy would it be if the Treasury returned to simply raising the revenue it needed to meet government spending commitments, leaving the economy to manage itself through the invention and ingenuity of people and businesses? How easy indeed, but unlikely considering the never-ending supply of politicians with their little but expensive projects and their conviction that only through their endeavours can we be saved.

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