Published on Times online, by Anatole Kaletsky, April 27, 2009.
My first reaction to Wednesday’s Budget was to focus on the increase in the top tax rate, rather than the explosion in public borrowing that horrified other commentators.
On examining the Budget documents in greater detail, I am more confident than ever that the tax rise was Alistair Darling’s biggest blunder; but I have to concede that some other decisions and numbers hidden in the small print were far worse than I first thought.
All the dire-sounding predictions of national bankruptcy seemed irrelevant to the point of absurdity for several reasons.
First, it is perfectly reasonable for the Government to borrow 10 or 12 per cent of GDP if private businesses and households are paying back their debts at a similar rate.
Second, there is no reason to believe that a rise in national debt to 80 per cent or even 100 per cent of GDP would create any serious economic problems or would, in itself, lead to high interest rates or a collapsing pound — Japan has had the world’s lowest interest rates and strongest currency with double that level of public debt.
Third, and most important, the horrendous fiscal predictions produced by the Treasury last week are all based on completely meaningless economic forecasts that are certain to be overturned by events in the years ahead. If the economy recovers fairly rapidly, as the Treasury is expecting, experience suggests that the fiscal numbers will end up being far better than any forecaster now dares to imagine …
… Yet the Budget tax measures seem deliberately designed to ensure that Britain’s financial and business service sectors never return to the global dominance they enjoyed.
This may seem an appropriate response to excesses and malpractices of the banks. But before concluding that the highest marginal tax rates among G7 countries will be helpful to Britain because it will encourage the transformation from a post-industrial to a post-financial economy, three caveats need to be considered.
First, transition from a financial to a non-financial economy is bound to be a slow process. A lower exchange rate and ready availability of skilled workers who might previously have worked in finance should, in time, stimulate export and manufacturing industries, but this will take years, if not decades, and during transition, Britain will still need healthy financial and business services to provide tax revenues and employment growth.
Second, if Britain does eventually reduce its reliance on finance and highly paid bankers, other industries will have to carry a bigger share of future tax burdens. The structure of the British tax system will have to change so as to bear more heavily on manufacturing and middle-income workers.
Third, it appears that many of the other industries in which the UK has a natural comparative advantage — pharmaceuticals, advanced electronics, engineering design, architecture, entertainment, management consultancy, law, advertising — rely on highly paid and internationally mobile workers and businesses. In many cases, these industries will be just as affected as the banks by high marginal tax rates.
So, it is far from clear that other parts of the UK economy would gain from policies designed to shrink the financial sector. It seems likelier that efforts to punish bankers and create a post-financial economy would end up hurting many other industries and would harm prospects for economic recovery and employment growth, at least during transition to a new economic structure.
That, in turn, means that the growth of government revenues and the solvency of the British welfare state will depend largely on what happens to the international competitiveness of the financial sector. The logic of the Budget is simple: those who want to punish the bankers could end up destroying the welfare state. (full long text).