George Osborne has reconsidered his proposal to slash tax credits; so far, so good, many will think. But does “austerity” harm the economy, and would its opposite help?
When those who have most get more, it seems they invest it, so that doesn’t stimulate consumer demand (though it seems to inflate asset prices).
Conversely, if the poorer sort receive more, presumably they will spend it – but on what?
Almost everything extra they may buy will have been imported, so although there would be a boost to GDP and to some extent domestic middlemen would have a bit more profit, the trade balance would worsen. The total debt then increases and is recycled as loans to UK plc, or purchases of UK assets.
What can be done, in a money-shuffling way? Not much.
Tax? Business entities swell through M&A and have the resources to pay super accountants to find ways to avoid paying UK tax. Individuals taxed too highly begin to value more personal time over potential extra earnings (unless they have massive City incomes).
Interest rates? Significant raises in interest rates would rapidly cripple the public finances and depress demand in an already stagnant economy.
Flogging the family silver? We are running out of things to sell (Birmingham has lost Rover, HP, Cadbury’s and both major breweries, just to offer a touchstone of how things are developing).
Is there a way out of this trap?
Maybe the government could transfer its attention from money to real things – the making and selling of them. A review of trade agreements – fighting our corner – would be good.
Hmm.
