Thursday, 2 October 2014

David Cameron's astonishing over-confidence

David Cameron's conference speech to the Conservatives gathered in Birmingham (above) was very effective - politically. By turns stern, emotional, electioneering and aggressive, it was a great deal better than Labour leader Ed Miliband's limp effort of a week ago. It offered some hope amidst the dim greyness of constant pay freezes and falling wages. The promise of big tax cuts seems, in particular, to have shored up the Prime Minister's relatively weak electoral and partisan position - for now.

But read in between the lines, and the numbers just don't add up. It's an example of post-modern or 'hyper-real' economics, in which you 'represent' the economy as a series of views, angles and links rather than thinking of it as a really whole thing or functioning system. Interesting theoretically - not so comforting when it's your state currency and budget that's being messed about with. Now it's our job here to look at the economics of what voters are being sold. We had to conclude just last month that the Scottish Government's financial plans for Scottish independence were pitifully inadequate. Now we're going to have to pass the same judgement on Conservative plans, for two reasons: the distributional effect of the proposed changes, and their implications for economic policy as a whole.

Two changes are promised. The first, to raise the threshold for Britain's higher 40% rate of Income Tax, and the second, to raise the lower threshold at which workers pay Income Tax at all. What this actually means is that better-off taxpayers will get a great big old bribe if there is a majority Conservative government. Consider two cases. Middle manager Mrs A earns £50,000. She'll benefit from paying 20% less of her income to the taxman on her earnings between about £42,000 and the actual level of her salary. So she'll be £1,600 better off a year - or 3.2% richer. Now pensioner Mrs B earns £13,000 when you look at her combined state and private pension - not a king's ransom, but enough (with no mortgage) to be able to live with a tiny bit of comfort. She won't have to pay 20% tax on her income between about £10,500 and £12,500 - so she'll be £400 better off, or about 3.1% richer. Except that Mrs A will also gain that extra £400 from the raising of the initial threshold, so her savings add up to £2,000 a year - four per cent of her income. So the better off will do better. Those on the lowest incomes, perhaps labouring part-time in Britain's big old supermarket economy? They'll get very little, if anything, since the threshold rises of 2010-15 have already pushed them out of the personal tax system, and there was nothing said in Birmingham about raising the National Insurance threshold that might still help them. The Liberal Democrats have so far made sure during this coalition government that the upper bands have not moved up, in order to stop the better off gaining much from the movement of the lowest band. That'll stop now, if there is indeed a Conservative overall majority, and to be honest it's quite an inducement to basically be offered £2,000 in cash if you are lucky enough to earn £50,000 (which the great majority of Britons do not). Do you want two grand, for free? Of course you do.

But the whole thing - and the Chancellor's prior pledge to abolish Inheritance Tax on pensions, which also disproportionately advantages the richest citizens - is completely and utterly uncosted in terms of the savings needed to deliver these plans. The two pledges would cost £7.2bn over a whole Parliament - though much more if they were to come in quicker than 2020. There's nothing to balance this for the Exchequer at all. We've had £3bn in pledges of welfare 'reform', mainly in cuts to tax credits which will make it even harder for those on the edge of the labour market to move off benefits and into work. But George Osborne, as Chancellor, has also said that he wants to clear the deficit before the end of the next Parliament - announcing £25bn in completely vague and back-of-an-envelope cuts in a Conservative Govenrment's first two years. So departments will have to find at least £32.2bn in the first few years of the next Parliament, and probably a lot more (£40bn? £50bn?) if the pathetically slow progress of debt reduction is really to gain a hold. While protecting schools and National Health Service budget, so deliberately evoked by Mr Cameron yesterday.

Newsflash: it ain't going to happen. It's the stuff of economic science fiction. Just as this Parliament's deficit-reduction strategy was torn up in 2012-13, so this A-Level economics guff will be conveniently forgotten about. It's just like Kenneth Clarke's promises in 1996, before another election the Conservatives feared that they would lose - written in invisible ink, ready to disappear the day after the contest. Present Ministers cannot possibly think that they are going to stick to this plan to cut 8% or 9% more than they are already, since the spending planned to come into effect during 2015-18 are nearly as big as those executed in this Parliament. It would mean the evisceration, and really in some areas just outright cancellation, of government as we know it outside of compulsory education and acute health. Police? Universities? Local authority elderly care? Child protection? Defence? On this showing, they'll take a kicking that'll make 2010-15 look like the good years.

Now such unrealistic promises might well work electorally. Tax-cuts-with-added-hangover worked for the Conservatives in the General Elections of 1955, 1959, 1987 and 1992. But don't let anyone tell you, ever again, that our electoral politics are now a choice between deficit cutters and spenders. Because they're not. Now they're a choice between public sector spending and signing big fat cheques for the better off. It's an astonishing turnaround for a party that promised better stewardship of the public finances, and now seems to have abandoned even the last pretence of sticking to their economic plan. While all the time saying that they have and they are.

Can they get away with it? Only time will tell.