That Fiscal Event

A letter to my MP, Craig Tracey, following the disastrous 'Fiscal Event' announced by the new Chancellor of the Exchequer, Kwasi Kwarteng:

28 September 2022

Dear Mr Tracey

I note that you have not always voted with your own government – notable recent examples in the latter stages of the Covid pandemic were your opposition to putting in place various measures designed to protect Care Home residents from visitors carrying the virus or people going to concerts or indeed the continuation of proxy voting in the Commons to avoid its continued spread. And of course, as a long time Brexiteer, there was your opposition to any attempt to delay the UK’s leaving the EU, with the corollary that, as far as I can see, you did support the Northern Ireland Protocol. Which has obviously proved to be a major success.

As the MP for my town of Coleshill, I would be interested to hear from you whether or not you support the government’s new economic policies as set out in the Chancellor’s ‘fiscal event’. Now I appreciate that Mr Kwarteng’s supply-side reforms are, as he explained, the ‘new economics’ and so to be welcomed in place of the old hide-bound, Treasury orthodoxy. This, even though, so far, they do not seem to have gone down awfully well with the markets.

Obviously as the main proponent of the new economics, Professor Patrick Minford is a sage to be listened to. In arriving at his conclusions, however, I do wonder if he has taken into account the fact that most people in the world of investment do not seem to agree with him and what that failure to take on board his ideas means in, what we might loosely describe as, the ‘real world’.

Economics is after all a description of how and why financial transactions take place. As such, it needs to take into account what other actors believe is the way the financial system works. Not to do so, particularly when we are asking for investment from them seems exceedingly foolish.

Economic theory cannot therefore simply discard the beliefs of other economists if they are part of the current system, however 'wrong' they may be. It is not like a religion where purity of belief is required. In economics, the beliefs of others are an integral part of the system and therefore must be allowed for. The possible loss of confidence in the UK economy as a result of that ‘misguided’ thinking is therefore certainly one of many interconnected factors that any economist should consider in arriving at an opinion on how we should proceed as a country. Economics is by its nature a way of looking at how real interactions between people and institutions will play out, rather than a fixed view of how they should work in a theorist's ideal world.

With the pound tanking, as a result of that lack of confidence there is, as an inevitable consequence, significant further upward pressure on inflation and so the interest rates demanded by investors in the bond market. None of this, however appears to have been factored into the decision to stand everything on its head which was rushed out last week without any supporting data from the OBR.

The old saw of trickle-down economics seems to have come back to haunt us despite the complete lack of evidence to confirm that it works to any significant extent. I am not exactly poor and I can tell you that any extra net income I receive does not necessarily get spent in the UK or indeed spent at all. The rich do in fact spend some of their wealth, but they also invest it in order to become more wealthy. We can see the result of this in the increasing capital inequality growing around the world as a result of an international tax system biased towards the rich.

And of course we have, at the same time, the invocation of the Laffer curve to tell us that reducing tax rates automatically increases the tax take from reluctant tax-payers. This is again a theory without evidence to back it up, as witness the disastrous Kansas experiment led, with the governing politicians, by Professor Laffer himself.

In reality, Laffer only told us as the rather obvious fact that both 0% and 100% taxation will produce no revenue at all, but he speculated that somewhere between there might be a sweet spot. He postulated that If you tax people too highly, then there may be some reduction in their willingness to work or create businesses. There is, however, no actual evidence to show us where, or if, there is a predictable, optimum point between those two extremes which can enable us to maximise revenue. People and society are far too complicated. But it is nonetheless a Conservative article of faith, even though German productivity is higher than ours, and this despite a corporation tax rate of 30%.

I do not know who you voted for in the leadership election won by Liz Truss, although I believe that you were one of the people originally supporting Penny Mordaunt, who is now a supporter of Mrs Truss, and has become one of her ministers. I therefore imagine that you will not have supported Rishi Sunak with his ‘old economics’ beliefs in how the country should be run, but instead the new economics of Liz Truss and Kwasi Kwarteng.

Perhaps therefore you could let me know in what way you see the country benefiting from the new approach and your evidence for it.

It is rather ironic that at the last election, we had an extremist ideological left-wing leader and his chancellor and at the next election we shall have their mirror image - an equally extremist, but right-wing, ideologue and her chancellor who, according to current opinion polls will sink without trace. Jeremy lost for Labour. Liz looks as though she will achieve the same for the Conservatives. I thought Boris was awful, but Liz and Co....

I look forward to hearing from you.

Kind regards,

Paul Buckingham

A follow-up letter to my MP Craig Tracey sent on 13 October 2022

Good afternoon Mr Tracey

I refer to my email to you of 28th September and await your reply.

I cannot see either from your twitter or Facebook accounts or your web-site that you are in disagreement with the contents of Mr Kwarteng’s mini-budget or indeed its subsequent alteration to maintain the 45% tax rate. I have to assume therefore that you are in fact in agreement with the mini-budget as amended.

Nether have you said that you disagree with the statement yesterday by our new Prime Minister, Liz Truss, that there will be no reduction in public spending, just a commitment to more efficiency in the way that spending is managed.

The government also however considers that various changes can be made to our legislation in order to promote growth (the so-called supply-side reforms), such as easing of planning regulations, reducing employment law protections etc. Obviously, however, the market does not consider that such changes would be sufficient to promote the growth necessary within a reasonable time-frame to bridge the gap between expenditure and income.

The market is instead telling the government very clearly that the gap between government spending and income is unsustainable. Margaret Thatcher herself said ‘You can’t buck the market”. Why is it that this government, with your support, is trying to do just that?

The only good news today is that the market is currently pricing in the imminent prospect of further U-turns by your government, including an increase in Corporation tax. Let us hope that they take place, because if they don’t then there will inevitably be a substantial rebound effect. And if that happens then the steps ultimately taken to undo the effect of the mini-budget will need to be even more wide-ranging.

Kind regards,

Paul Buckingham


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