Recipe for Recovery?

The Economist critiques Gordon Brown’s tax changes in the UK. By pandering to the masses and allowing dictation of policy by politics, they will damage the long-term recovery prospects for the economy and drive out the economy’s highest earners. The entire country will suffer for this myopia, even if voters are not angered in the short-term.

There is no doubt that the fiscal position of the British government is not particularly healthy, and revenue needs to come from somewhere.  The Bank of England has so far kept the British economy moving, but at a price.

The UK’s debt is higher than any other country in the world, with the exception of Ireland. The Economist estimates that public debt will rise to 79% of GDP by 2013-14. The currency exchange movements have raised the real burden of this debt, although it has kept the economy competitive.

This is the key difference between the two nations. Employment is being maintained in certain areas, because labour is competitively priced due to sterling’s weakness. The UK has chosen this devaluation, at the expense of becoming a nation in bonded servitude. It remains to be seen whether this was a good trade-off.

To get through this difficult period, Gordon Brown needed to bring his country into a fiscally prudent position. Hopefully, this would appease creditors and reduce the burden of the overwhelming debt.

However, it would appear that political machinations has shaped his most recent budget. Rather than strengthen his position by expanding the tax base, Gordon Brown has decided to hit high-earners in a populist move.

This will only lead to a reduction in declared incomes at the top, which will become more of a problem as consumers start to feel the pinch of recession. Meanwhile, high-earners (as the most foot-loose of all workers) may seize the opportunity to leave the country for less burdensome shores. Non-nationals are being especially targetted, even though they are those with fewest ties to the country.

These measures will not bring in enough to plug the tax revenue gap, with the result that the Prime Minister will end up assaulting the middle-classes before the end. They are more numerous and less sensitive to taxation in behavioural terms, which makes them the easiest target for tax hikes.

The economy will be punished because Gordon Brown was unwilling to make this tough decision now. He will be punished by voters anyway, because he will have to hurt them eventually. Unlike Labour, those high tax rates will stay after the election in 2010. The British economy can only hope that the ubiquitous poor treatment of high-earners reduces the impact of his blunder.

© The Free Marketeer 2009

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