News from British and Canadian Conservatives

Sunday, April 26, 2009

Crisis? What Crisis? History Repeats itself.

Margaret Thatcher once said "The problem with Socialists is that, eventually, they run out of everyone else's money as well." So it has proven after 12 years of Labour Government. This weeks' budget was shocking. Last year the British Government borrowed an astonishing £90bn, more than double the previous record borrowing requirement in 1993. This year they plan to borrow a further £175bn, followed by £173bn, £140bn, £119bn and £97bn over the next few years. The national debt will soar to 79% of GDP, and is independent analysts say it could take until 2050 to get back to a balanced budget. These figures don't even include the Enron-style off-balance-sheet liabilites, which could easily push the National Debt to 200% of GDP. Labour's response: let the Conservatives sort it out after next year's General Election, which seems set to return a Conservative majority.

Laughable Growth Assumptions

What is even more amazing about these horrific borrowing figures is that they are based upon wholly unrealistic expectations of economic growth. This year the government is banking on a contraction of 3.5%, followed by growth of 1.25% next year. The recession will, apparently, end this Autumn! By contrast, the IMF's figures this week forecast that the British economy will shrink by 4.1% this year and a further 0.4% next year, suggesting that borrowing could actually be far higher. From 2011, the government is forecasting a veritable golden age of economic growth - 3.5% a year, compared to 2.5% long term trend rate of growth. Whatever Alistair Darling (the Chancellor of the Exchequer) and Gordon Brown put on their cornflakes in the morning, I want some.

The government's limited response has been to propose that the public sector will grow by 0.7% a year from now on, which is a dramatic reduction from the plan last autumn for growth of 1.1%. Even that represents a marked reduction from previous years. How do they plan to achieve this reduction? They have no plans, safe in the knowledge that they won't be the government that has to sort it all out after next year! It will actually be very difficult to achieve, thanks to the massive level of off-balance sheet liabilities that this government has run up in the form of "Public Private Partnerships." These are schemes where private companies build facilities such as schools, hospitals, roads and sports centres, and the government pays them back over a period of upto 80 years. Also known as a mortgage, but not debt, according to the government. So much of the government's spending is now tied up in these schemes, that the next two generations of government will have limited options for cutting back spending.

Other than that, there will be some tax rises. Labour raising taxes? Surely not! So far, we know that petrol at the pump will rise by more than inflation every year, thanks to further increases in the already eye-watering levels of tax levied on a litre of fuel in the UK. Even after the recent decline in oil prices, the parallel drop in Sterling (around 35% agains the loony over the past year, and even more against the US$, in which oil prices are quoted) and the rise in tax have kep prices near the £1 per litre level. Of course, that's a "good tax" because it's environmentally friendly. Has Gordon Brown been taking lessons from Stephane Dione?!

Taxing Success to Fund Failure

The real message of the budget was that Labour plan to ignite a class war, by soaking the rich with new taxes. A new 50% income tax band for those earning over £150,000, the abolition of the zero-rated portion of income for those earning over about £100,000, and increase in National Insurance Contributions (Income Tax in disguise) of 0.5% and taxing pension contributions by high earners are nothing more than a con-trick. They want people to believe that the budget crisis can be solved by getting the rich to pay more, leaving the rest of us to live our lives without interference. The truth is very different. Independent analysis has suggested that the tax rises will raise little or no revenue and could actually cut tax yields, as wealth creators either flee the country for lower tax regimes like Switzerland, or pay their accountants to find new ways to avoid the taxes. The only winners are likely to be the accountants. Meanwhile, even if the well-off decided that they would keep paying over the majority of their incomes for the government to squander, the amounts of money that can be raised from the wealthiest 1% of people are limited, because there aren't many of them.

The truth is quite simple. Everyone in Britain is going to have to pay dearly for Labour's economic incompetence. And the legacy of New Labour will be generations of higher taxes and poorer services, as the government pays out more in loan interest than it does for schools or hospitals. Government borrowing is, after all, a tax on the future.

The words "Crisis? What Crisis?" were used by the press to sum up the attitude of Labour Prime Minsiter David Callahagn in the 1970s. The same sentiment is clearly recognisable in this week's budget. Both events happened one year before a General Election. In 1979, Margaret Thatcher swept to power, ushering 18 years of Conservative rule and a revolution in the British economy. Next year, David Cameron will be faced with similar challenges, as well as the collapse of Britain's moral fabric. He will need to bring about both an economic and a social revolution if his is to repair Broken Britain.

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