Ed Balls is talking about Labour’s ‘big strategy’ decisions on taxation and spending. He wants to be seen as ‘ruthless and disciplined’ about ‘every penny’ of public spending. Hence his ‘zero-based budgeting review’, which is really a bit of motherhood flim-flam, totally devoid of specifics, dreamed up for the benefit of credulous voters.
The real problem with the economy is lack of demand. The mass of people don’t have the money, or the confidence, to spend unless they have to. So sales are slow and businesses are similarly reluctant to invest till better times return. But the politicians, including Balls, are locked into their simplistic undergraduate understanding of the economy. That was the situation when FDR made his inaugural call that ‘the only thing we have to fear is fear itself’. It’s that fear that prevents Balls suggesting anything remotely like a new New Deal. In his fear, he’d rather be seen to be ‘ruthless and disciplined’ considering chopping ‘every penny’ of public spending, rather than proposing selective increases to the public spend to create jobs, financed by some higher rates of tax.
So much for the spending part of Balls’ taxation and spending review – it’s going to be much the same as Osborne’s, mostly cuts, but hopefully without the cock-ups.
So far as taxation is concerned, Balls sounds, as his New Labour mate put it, intensely relaxed about people getting filthy rich. The only valid justification for that intense relaxation is the trickle-down argument, the idea that money the filthy rich fail to spend on themselves – even they find there are limits to conspicuous consumption and conspicuous waste – will be invested in manufacturing, distribution and non-financial services, creating jobs and stimulating the real economy. It used to work like that, but over the past two decades trickle-down has ceased. It is now only a naïve and false belief. Or a cynical obfuscation.
The reality is the money the filthy rich don’t spend on themselves is passed to a professional fund manager who invests it where it will make the biggest return. Surprise, surprise, that is no longer the real economy. Since ‘big bang’ and financial deregulation, the biggest returns, by far, are earned through creating and exploiting all sorts of speculative bubbles in various kinds of securities. Some are in commodity markets which can be successfully rigged by the likes of Glencore (see http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/. Others are in deliberately opaque financial ‘products’ such as the derivatives and swaps which were a prime cause of our present difficulties. And, of course, the avoidance and evasion of taxations is a prime consideration. There is no longer any trickle-down to the real economy, neither from the untaxed income of the filthy rich, nor from the quantitative easing being fed to the banks.
Balls should aim to revive trickle-down by making investment in the real economy more attractive than speculation. Initially at least, with the real economy flat, that can only be done by making speculative transactions less attractive. Firstly, it should be made illegal to offer products for sale without their ingredients being made absolutely clear, just as is required on a jar of marmalade (to quote an earlier posting on this site http://www.gordonpearson.co.uk/29/down-the-financial-plug-hole/). Balls should be concerned that it is perfectly legal to put taxpayers’ £billions at unknown risk on securities which are made deliberately opaque purely for the benefit of the filthy rich. But he appears to be perfectly relaxed about that.
Secondly, he should run with the transactions tax idea, but make it more sensitive to the needs of the real economy. It has only previously been discussed as a general tax on all transactions, but it could be made more discriminating. It could be levied on all automated transactions, slowing such transactions and making them less profitable. It could also be levied on short term transactions, involving securities which had been held for less than, say, six months. The argument against a transactions tax, made by both Labour and the Tories, that it would disadvantage the City of London as the lead European financial center, is no longer valid since the EU espouses the tax and would proceed if UK were on board.
One of the few specifics Balls has confirmed is the commitment to protecting the international aid budget. This may be entirely valid, but its justification on the grounds of “fairness and growth” is interesting. If Balls were to apply such criteria at home, he would necessarily be less relaxed about the current tax treatment of New Labour’s filthy rich friends, and act to revive trickle-down.
Maybe Ed should stick to the piano – Grade 2 is probably about his drop.