Outside the marginals

a commentary on the politics that followed the UK 2010 & 2015 elections

Capitalism: you can’t budge it

Last week’s budget was in some ways unsurprising – and we have not seen all the details yet.

Inevitable squeals from Labour that “the electorate did not vote for this” – but they did not “vote for Labour” either; they can watch the Conservative Liberal Coalition do the dirty work to tackle the unspoken issue of the last election – the Debt and the Deficit.  That has interesting consequences for all the political parties.

The budget is more progressive than many expected even if we do not see the pain being spread out in quite the way we like.  The VAT rise is an interesting case in point.  Food and children’s clothing is VAT exempt or zero rated (so no change – unless all your food is take outs and chocolate) and fuel remains at the same lower rate.  This would tend to imply that those who spend a lot on non-food, non-children’s clothes and non-fuel, will be hit the hardest – roughly in proportion to the amount that they spend on these items. (Spending on these items is unfortunately not proportional to income, because the rich may chose to save rather than spend on VAT able items.)  It is possible to work out by how much families at particular income levels are affected and to compensate them (e.g.  by raising benefits or tax thresholds).  The purists will argue that a progressive tax should bear at a progressively greater rate as income rises; the combination of a VAT increase and an increase in benefits or thresholds does not give rise to a smoothly increasing rate, but the rate (after starting at zero for those whose income is within the range that is compensated) will slightly increase as spending increases.

However, the above argument is complex and will not play through the media.  What will play is that the banks and bankers (who it is argued caused this mess – albeit with the connivance of our government) seem to be “getting away with it” and the rest of us are having to pay – and “it’s not fair”.

The argument for not whacking the bankers, but seemingly doing the exact opposite seems to run along the lines of:

  • If you heavily tax them , they will go abroad (and apparently you cannot say “and good riddance”)
  • If you insist on them paying levies and maintaining or improving liquidity ratios, there will be less money to lend.
  • You cannot suggest that the banks pay out less to their shareholders, because:
    • Their shareholders include our pension funds – which are struggling already
    • Less dividend income means that shareholders will sell their shares, thereby increasing the supply of bank shares which means their price will drop.  If the value of the shareholders funds (the shares) drops, the proportion of the banks funded by debt increases, which means the cost of that debt increases to reflect the increased risk of default – which was part of the problem in the first place.
  • You cannot suggest that they might like to reduce the bonuses paid to their staff:
    • Alistair Darling’s Bonus tax raised more than was expected – because unexpectedly the bank’s thought it was worth paying.
    • Many bonuses have been converted into base pay (which does nothing to reduce the pay-bill, but decreases the proportion paid as bonuses).
    • The “good” bankers are internationally mobile and will move elsewhere.

So it seems that we are stuffed and ruled by the rules of Capitalism and you cannot budge them.

The United States has realised that its dependence on foreign oil is strategically dangerous; perhaps our dependence on Capitalism is also strategically dangerous.  So can we reduce our reliance on Capitalism – specifically on Capital?  Perhaps we can – if we are willing to give up some of the material things that make up our standard of living – which of course is what is going to happen as a result of this budget (and the forthcoming public expenditure cuts).  The Government is doing the dirty work that collectively we are incapable and unwilling to undertake.

So how will this affect the political parties?

  • The Conservatives are probably pleasing their core vote, and the richer members will probably be able to avoid the worst pain (either through accountancy advice, or through using economic power to get “better deals” by squeezing their employees and suppliers).  Non-core voters unveiled into voting for them at the last election may regret their choice, but to whom will they transfer their support?
  • The Labour Party are out of power so can claim “not to be responsible” for the pain and they can squeal and complain; this will please their core-vote who do not seem over inclined to blame Labour for losing the last election.  Provided the current Government ensures that we take all the medicine during this parliament, Labour may be well placed (with a new leader) to claim to be the party to “right the wrongs” being done by the current Government.  They may also hoover up support from the party that they will blame for putting the Tories in office – and hence permitting all the pain that we are due to suffer.
  • The Liberals could be facing an extremely difficult position; they believe (like all politicians) that something needs to be done, but like the Conservatives they have vocalised that need and acted on it.  They now need to pull off the difficult trick of persuading the electorate that the medicine was inevitable, but they have sugared the pill and got some extras (abandonment of ID Cards, no third runway, lifting those earning less than £10k out of tax, etc.).  If they can’t the big question then is “what is the point of the Liberal Democrats?” (And the Conservatives were already committed to items like no third runway, and abandoning ID Cards).  I still think they may be toast – if you support the Coalition, why not vote for the real thing and vote for the Conservatives; if you oppose the Coalition, then vote for the party that is clearly anti-coalition – Labour.
  • The other parties are going to be untainted by the difficulties of this Parliament, and will be positioned to claim the “none of the above” vote in addition to their core-vote.

The next election could be interesting!

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