Wednesday, 14 April 2010

Two socialists, one bottle

Europe has had an interesting double-act on his hands during the economic crisis, though not a great deal of attention has been paid to it.

On the surface there are many similarities. Britain and Spain both have socialist prime ministers, both of whom were in office well before the crisis struck and both of whom present themselves as the best people for the job of handling the mess they did more than a little to inflame.

Unlike the Greek socialists, both Gordon Brown and José Luis Rodríguez Zapatero are in the difficult position of not being able to blame their predecessors for the almighty mess their countries are in. Zapatero has led his Socialist government since 2004 while Brown has effectively held the reins of the British economy since 1997. No escaping that one then.

But differences between the two become more apparent the further you dig. A feature in Monday's FT explained how "Spain was one of the few countries to run a budget surplus during the good times [and] entered the crisis with a low level of government debt - even now, at more than 55 per cent of GDP, it is 20 percentage points below the eurozone average"

The great difference between the two though comes, alas, from what they are actually willing to do about it. For Zapatero, the crisis gave a cold sobering slap in the face to a government that was riding on an artificially-induced post-euro euphoria. He now openly talks of 'austerity' and 'cuts', admitting that necessity commands he must do the unpopular but right thing.

What is Brown's answer? Mo' spending, mo' spending, mo' spending!

While his iberian counterpart talks frankly and honestly to the Spanish people about the hard times ahead, Brown prefers to hide his head up his own backside while criticising the leader of the opposition for saying the same thing. No wonder Ellie Gellard wanted to get rid.

This behaviour represents two things. Firstly, Labour's inability to engage with voters in an adult manner - why speak honestly when you can dangle debt-funded welfare treats infront of the electorate? Secondly, Brown's infamous inability to make tough decisions.

To his credit, Zapatero has excelled on this front, despite having a great deal to lose. The Spanish general elections are only two years away and, like Labour, the Spanish Socialists rely heavily on the trade unions, who are not going to be happy.

Undeterred, Zapatero told the FT (emphasis added): "We've just taken difficult decisions. Raising VAT, I can tell you that's not something that's been done to get people applauding us. You just have to look at the reaction of public opinion. From here to the elections our policy is going to have to be one of austerity and cost cutting ... There is no other way."

Can you imagine such talk from Brown? No, of course you can't. His claim to be a conviction politician has been exposed as the biggest single lie of his premiership (start as you mean to go on they say...)

Speaking of which, I couldn't help reading Zapatero's austerity plan without thinking of that other great conviction politician Brown facetiously compared himself to. Could this socialist be a Spanish Thatcher in the making?

The prospect is certainly an amusing one, but the evidence is compelling. Zapatero told the FT he plans to raise VAT, confront unions over labour reform, raise productivity, increase flexibility and emasculate the bureaucratic and spendthrift regional governments.

The idea of a Thatcherite socialist might sound something of a bad joke, but Zapatero's steadfast ability to look reality in the face and make tough fiscal decisions shows the only joke in the room to be Gordon Brown.

Another four years of Labour however would not be at all funny.

Friday, 2 April 2010

Even the Blair years showed the benefits for all of low taxes, so why are we going back?

Henry Campbell-Bannerman said in 1903 as Liberal leader of the opposition: "To dispute free trade, after fifty years' experience of it, is like disputing the law of gravitation."

At the time he was railing against the Tories' colonial secretary Joseph Chamberlain calling for protectionist tariffs.

The Conservatives have since learned from their mistakes regarding protectionism - we are now proudly a free-trade and free-market party, carrying the torch of classical Liberalism into the 21st century.

The Liberal Democrats seem to have forgotten these lessons they once so passionately taught us, while Labour seem to be suffering from learning difficulties.

Take for example the 50p tax rate, introduced this month. One financial crisis is all it took for Labour to return to their old unfounded, disproved prejudices regarding taxation.

Geoffrey Howe and Nigel Lawson's incremental reductions in the top rate of tax from 83% in 1979 to 40% in 1988 cemented the growth of the British economy after the Thatcher years (with a minor blip in the early '90s) and greatly increased the wealth of the nation.

Figures published in yesterday's Financial Times from the Institute of Fiscal Studies (IFS) show how this new orthodoxy continued under Blair and, crucially, remained the most effective means of redistributing wealth.

The IFS contrasted Labour's taxation plans in the 1992 election under Neil Kinnock and John Smith with the actual results under Blair and Brown between 1997 and 2010.

As alarming then as it sounds now, Labour planned to impose a 50p tax rate for all earnings above £36,375 - that's still only £56,000 in today's money. Yet by their own figures, the poorest in society could only hope to gain an extra £2 a week.

By contrast, since 1997 the poorest two deciles of society have seen their incomes rise by more than 10%. For the richest, their incomes have shrunk by around the same amount.

To dispute low taxation then, after thirty years' experience of it, is like disputing the shape of the earth.

But the first economic crisis Labour have had to deal with since the one they created in the '70s has exposed them for the flat-earthists they are. They simply cannot learn from their mistakes or, it seems, their successes.

As a small aside, the Financial Times claimed on the same page that levels of disposable income have greatly declined under Labour. According to the report,

The slowdown in household income has come as the population has increased fairly rapidly, but also as wages and salaries have been stagnant in spite of big rises in profits at companies.

Could this slowdown be a consequence of the minimum wage? After all, if firms have to pay their employees more, they are going to employ less of them. This increases unemployment (and with it, benefit payments) while those who are in work are heaped with greater and greater responsibilities - most likely less productively because of the stress they are under.

Businesses, refusing to see their profits shrink, come under pressure to compensate for this through further firing, slave-driving and generally treating their staff badly, perpetuating the cycle.

The minimum wage may go up every year, but it would not surprise me if the £5.80 received today is worth less in real terms than the £3 workers would have received before 1997.