Bashing the rich is bad politics and rotten economics

Class warrior

GORDON BROWN has been many things in his time: co-author of market-friendly New Labour, Prudence with his hand on the Treasury tiller, friend of Britain’s all-important City. Now, with a general election less than half a year away, a new prime minister is emerging. The well-off, already set to lose half of their earnings above £150,000 ($243,000) to the taxman, face a further cut to tax relief on their pension contributions; a promised increase in the inheritance-tax threshold has been shelved; those with offshore bank accounts will have their feet held to the fire, American-style. Mr Brown’s Conservative opponents, by contrast, have dreamed up their tax policies “on the playing fields of Eton”. Mr Brown’s inner class warrior has finally stepped forth (see article).
As one of the few set-piece occasions before the general election due by June for Mr Brown’s embattled government to make its case to voters, the pre-budget report (PBR) on December 9th (see article) was always likely to be more political than sensible. Even so it disappointed. Alleged dividing lines between Labour and its main opponents, the Conservatives, were dug deep into the sand: Labour, the party of the many, devoted to protecting public services and “going for growth”; the Tories, protectors of privilege and gleeful spending slashers.

Taxing bankers

Bankers’ bonuses are at the political centre of this issue. The banking system has received over £840 billion in state support one way and another, according to the National Audit Office. The money was intended to make banks safer (ie, to build up their capital) and more useful (eg, to encourage them to lend more) and has helped, in the event, to make them more profitable. Bankers in Britain were rumoured, until this week, to be in line for billions of pounds in bonuses for the year to April. Taxpayers are furious.

Hence the one-off 50% payroll tax at source on bank bonuses over £25,000 announced in the PBR. There are drawbacks—mostly practical—to this particular proposal. Banks will find ways around it; even the government thinks the tax might raise £550m at most. Moreover, banks argue that they need bonuses to lure and retain talent. This interference will irritate the City of London, generator in the good times of a quarter of Britain’s corporate-tax revenue, and could encourage people who are already being squeezed by a string of disobliging tax measures to pack their bags (see article).
This paper has argued that there are better ways to curb large bonus payments based on government-subsidised bank profits—namely, by charging a fee for the implicit guarantee that lowers banks’ borrowing costs. But such a big change ought to be co-ordinated internationally. In the meantime, this one-shot levy is a reasonable way of recouping some cash.
The bonus tax has garnered most attention; but other ways in which Mr Brown’s new theme has influenced the PBR are more worrying. A cut in pension relief risks turning off not just the prosperous but also those who aspire to be rich. The real problem, however, is that the government’s desire to portray itself as protector of the poor is getting in the way of the job it urgently needs to do—managing the public finances properly.
The big issue is how and how fast to replace fiscal stimulus with stringency. Too quickly, and economic recovery will recede; too slowly and creditors will start demanding higher interest rates. To err in either direction is to court disaster.

Balancing the books

Britain is the last of the big G20 countries still to be mired in recession. Its GDP has shrunk by 4.75% this year, far more than the 3.5% reckoned likely in April. Public-sector borrowing will be around 12.6% of GDP this year and not far off it next. The Bank of England, the OECD, the IMF and credit-rating agencies have all given warning that such deficits are unsustainable. It is time, in other words, for the government to come up with a credible plan for reining in the deficit.
Alistair Darling, the chancellor of the exchequer, has signally failed to do that in the PBR. The fiscal stance is broadly unchanged from that in April’s budget. Spending will expand next year by £31 billion, or 2.2% after inflation, before hitting a more modest stride thereafter. Government borrowing will be slightly higher than predicted this year and next.
Mr Darling is rightly wary of withdrawing fiscal stimulus before economic recovery is well under way. But he ought to have produced a convincing blueprint for deficit reduction after that. He expects the economy to grow next year, by 1-1.5%, and by a heroic 3.5% in 2011 and 2012. Economic growth, a cap on public-sector pay and pensions from 2011, an increase in the employment-insurance tax, plus the usual unspecified efficiency gains and programme postponements are to help Mr Darling shrink the deficit each year as a percentage of GDP. But even on these assumptions, it will take five years to cut borrowing to a still unacceptable 4.4% of GDP.
It is pretty clear why Mr Darling has failed to offer the country an honest account of the cuts in public spending that are needed to restore the public finances to health. Bashing the rich is only half of class politics. Protecting public services, such as the imperfectly reformed National Health Service (see article), is the other, for public services are disproportionately used by the poor, and their employees tend to vote Labour. By looking after the state, Mr Darling and his boss are looking after their core vote. Tony Blair was willing to use market mechanisms to improve the efficiency of the health service, and there is evidence that they were working. Under Mr Brown, however, those reforms have stalled. Market reforms are not what class warriors do. They prefer to protect budgets than to increase efficiency.
Britain has much experience of class politics, and none of it has been good. Class politics makes for bad economics: the state swells, public money gets wasted and entrepreneurs grow nervous. And it makes for a sad country, too: divisions deepen, suspicion flourishes and the social contract frays. When the time comes to judge the parties’ electoral strategies, voters should remember that.