Oh Dear Darling

“If you take money out of the economy now, in a year when you’re beginning to see recovery, that is taking a great risk…”

That\’s Alistair Darling on the Today program talking about the Tories\’ plan to curtail the coming national insurance rise.

As Fraser Nelson rightly observes, not raising taxes is not taking money out of the economy. Money that is not raised in taxes does not disappear from the economy, it fructifies in the pockets of the populace.

Now whether it fructifies more in the government coffers than in those of said populace is a slightly different question. If we\’re to be honest about it (as opposed to being either ideologically or party politically rigid about it) it\’s a question of the margin. Even I, kitten skinning neoliberal that I am, would agree that the first 5 or 10% of national income going to the government produces higher returns than if it is left with the population. That Army and those courts do have to be paid for, they really are public goods and having them provided by the State really does make us better off.

There are of course those who say that the 45 th % to 50 th % of national income going through the government rather than sprouting, flowering and fructifying with the populace also increases the national wealth but then that\’s people like Richard Murphy and is obviously insane.

However, I do think that Fraser has missed a trick here.

Consider that the Tories do not raise NI. But also, they do not manage to find cuts in spending to fund such instead, they borrow to cover that gap. This really is putting money into the economy: it\’s fiscal stimulus. Increasing the gap between what the government collects in tax and what it spends is exactly that. It\’s absolutely no different than the cries from the Murphys and Compasses of the world that we must spend to support the economy.

Keynes, remember, is all about the gap between tax and spend, not the level of either.

Which leads us to a very amusing end note. Those screaming the most about the not rise in NI, those screaming the most about \”how will it be funded?\” are precisely those who should, from the other things they say, be most welcoming such a fiscal expansion if it is not funded by cutting spending.

10 thoughts on “Oh Dear Darling”

  1. Even I, kitten skinning neoliberal that I am, would agree that the first 5 or 10% of national income going to the government produces higher returns than if it is left with the population.

    Hmm… I’m not sure M. Bastiat would see eye to eye with you, (or is that not see?).

  2. re Kevin B- it depends of course on what the things that are not seen actually are. My guess is with Tim- a national defense under democratic control is far better value than defense left entirely in the hands of the private citizen. A legal system consistent across the country and similarly controlled is better than one in the hands of various private individuals. I have the impression that Somalia is currently run without a national defense force or law such things being organised by various private individuals called warlords- not an encouraging thought.

  3. Oh, I agree that a state run army and law enforcement are, on balance, probably justified but what Frederic is at pains to point out, and what inspires many of his readers, is that all this costs us a lot of money and we had better keep our eye on them lest they start behaving like bureacrats and state employees. That is thinking their emploment is for their benefit and not ours.

  4. “Keynes, remember, is all about the gap between tax and spend, not the level of either.”

    I’m not so sure about this, Giles Wilkes discussed this the other week.

    Imagine a country that received a subsidy of 4% of GDP from some external source. Then that subsidy was suddenly cut off. Its deficit grows by 4% of GDP. Is that stimulus? No. Of course not. Failing to collect £110bn of revenue that you thought you could collect is not all stimulative, as it would be if in pre-Crisis Britain you had lowered Income Tax or VAT to the tune of £110bn. Collapsing GDP incomes producing collapsing revenues does not equal a 10% of GDP stimulus, for pity’s sake!

    The state isn’t putting a lot more demand into the economy, the tax take has just fallen a lot.

  5. This is pathetic analysis. Next you will be telling us that money laundeirng and tax evasion all poin to economic stimulus becuse that is cash slushing in the economy. What did the Thatcher tax cutting years achieve? North Sea revenues were squandered, tax cust for the rich, pensioners lost out, NHS crippled, schools crumbled and Toxteth riots. So please spare us your lectures.

  6. Ricadian equivalence.

    Governments borrowing money to spend is not a stimulus. The taxpayer knows they will pay eventually, and increase saving (reducing spending) equivalently.

    That said, as long as the government can borrow at a lower rate than the private citizen, borrowing to spend isn’t necessarily bad, either. OK, so there might be a slight stimulus effect there, but it is two orders of magnitude less than what might be expected.

  7. Borrowing is, or at least can be, a form of stimulus; it takes future money and uses it today. The issue is whethe the stimulus is positive or negative. this can only be determined when it comes to paying the money back.

    If the sum borrowed increases future income sufficiently to cover the repayments plus interest plus putting a little extra in the kitty then it is a good, or positive, stimulus. If, however, the future return is less than the future costs it is a negative one.

    Whether Mr Brown’s borrowing plans will lead to positive or negative effects is a matter for debate, but seeing as it is mostly being spent on running costs rather than infrastructure development I would suspect the final score will turn out to be negative.

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