Illiteracy of the tax-cut lobby

Slashing taxes cannot make a nation better off. Instead we must increase production


This article is taken from the June 2022 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Headlines are of course intended to cause groans over the cornflakes. But some are more groan-worthy than others. A prize should be awarded to the Daily Telegraph. Recently the main story on its front page was heralded with the words, “Sunak faces Cabinet pressure to cut tax: Chancellor urged to tackle cost of living crisis by easing financial burden on public”. 

Here is economic illiteracy of an extreme form. A nation’s ability to consume depends on its ability to produce. Unless politicians can increase that ability to produce, they cannot affect the total amount of potential consumption. This is an obvious and certain fact of life and should hardly need to be stated. Nevertheless, it appears that some members of the present Cabinet do not accept it. 

The point can be made a little differently. Some politicians (and not a few economists) are fantasists. They seem to believe that “the Cabinet”, or even a single individual in it, have magical powers. 

They think that by reciting some abracadabra with the phrase “the government” in them, any of “the Cabinet”, “the Prime Minister” and the “Chancellor of the Exchequer” can add to national output. The abracadabra may be given a bit of oomph by prefixing “the government” with the congregational “we”, as in sentences like, “We need the government to plan for more …”. 

Sorry. The laws of physics trump those of political economy. If something does not exist, it cannot be consumed. If the quantity of produced things goes down, fewer things exist and consumption must fall. An individual may have risen to one of the “highest positions in the land” and sit at the Cabinet table, but that does not mean he or she can defy reality. If the quantity of produced things goes down, fewer things exist and consumption must fall. That is that, finish, full stop, end of story. 

The unfortunate position of Britain and other countries at present is that their ability to produce has been impaired by the Covid pandemic, as well as other adverse influences of a more lasting nature.

A significant number of people who were working in 2019 seem to have decided not to work in 2022, in a phenomenon known as “the Great Resignation”. The efficiency of many economies has been disrupted by shocks and upsets of one kind or another, so that the world has an inadequate supply of semiconductors, a shortage of timber, too few ships to transport cargo and too few containers for the cargo to be loaded into, and so on. The Ukraine crisis has made matters worse by affecting supplies of energy and food.

Famously, Mrs Thatcher’s 1981 budget included big tax rises to help cut the budget deficit

So the quantity of produced things has indeed gone down, implying — sadly, but inevitably — that fewer things exist and consumption must fall. Cabinet ministers may huff and puff, and demand that the Prime Minister and the Chancellor of the Exchequer use the supposedly magical powers of the British government to “do something”, but the laws of physics will continue to impose binding constraints. (Critics might suggest the British government has in fact reduced output by proliferating ever more silly regulations and pushing for an early, very expensive transition to a greener environment. But that is not my main point now.) 

Tax cuts do not themselves make a nation better off. They may stimulate citizens to work harder and produce more, but it is the increased production — not the lower tax burden — that makes possible higher consumption. 

Senior figures in the Conservative Party, such as Sir John Redwood and David Davis, are cited in the Daily Telegraph story as being in favour of lower taxes today, although Britain is running a budget deficit of over £100 billion. The melancholy history of Latin America demonstrates that large budget deficits do not make nations rich and that increases in budget deficits do not lead to higher living standards. 

Margaret Thatcher did in jest once propose the abolition of economists, but she understood that budget deficits have to be financed and that borrowing from the Bank of England creates new money balances. She was also persuaded that rapid growth of the quantity of money resulted in inflation. 

Her government did its damnedest to curb the budget deficit as part of a larger programme of monetary restraint. Famously, the 1981 Budget included big tax rises to ensure that the budget deficit would stay on a downward path. As the Margaret Thatcher Foundation correctly notes, that Budget was “one of the defining moments in the history of [her] government”. 

Rishi Sunak is again being criticised for raising National Insurance and thereby boosting revenue by £12 billion a year. It needs to be highlighted — as I did in my last column (The Critic, May 2022) — that the reduction in the real value of the national debt because of inflation will in 2022 deliver an effective tax increase of about £200 billion. 

To steal from investors by reducing the value of money is a shabby and disgraceful process, and the antithesis of the sound money which the Conservatives claim to support.

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