Today is General Election day in the United Kingdom and there are some local elections (including in my area) too. I would firstly like to repeat my appeal of some weeks ago for people to vote. If I remember the quote correctly someone once said that democracy was five years of dictatorship followed by one day of choice! I hope we will all use that choice as people have died fighting for this right in the past. If you feel our current politicians probably do not deserve it then I agree with you but principles are more important than them, and if you cannot vote for something you really believe in then you can at least vote for the least worst. Sadly none of the above is not currently a choice on the ballot box.
Economics in the UK election
There has been one fundamental economic question for the UK over this election and let me use the quote from Kenneth Clarke that I first used on the 23rd April.
“The most urgent question in this campaign is, quite simply, which party is capable of tackling public spending and getting a grip on the deficit.”
The truth is that none of the parties asking for your vote today have explained how exactly they will get a grip on the deficit and none of them have shown any clear clue as to how they will tackle public spending. This is a failure of democracy in my view. What we actually got were some presidential style televised debates. Whilst these may have had some value they shed no light at all on what in my opinion will dominate the next few years. As one of the comments on here pointed out we elect constituency MPs in the UK and not Prime Ministers.
My view from the 23rd April remains true there are two fundamental questions which remain unanswered.
1. Exactly how will the required (large) squeeze on public spending actually be achieved?
2.Official forecasts for growth in the UK economy are very optimistic, what will happen if these are not achieved in reality?
Just to give an example of point two our official UK forecast for growth in 2011/12 is 3%, the European Commission has just announced that it thinks it will be 2.1%. It may sound like minutiae but the lower tax revenues and higher government spending implied in such a difference would have a big impact on our fiscal deficit.
Economic Mistakes/illiteracy During the campaign
Gordon Brown: He pledged to save £1 billion from improving the administration of Child Benefit. This is quite hard to do from an administration which costs around £75 million a year.
He also seemed to think that £6 billion of public spending cuts by the Conservatives for this year would have a big effect on the economy but £12 billion of tax rises he proposed for next year would not.
Nick Clegg: Called for a meeting of Chancellors, the FSA and vice-chancellors. This was rather curious as I do not know of a political party which has a Vice-Chancellor! The only role of this sort to my knowledge is at various universities.
The mansion tax debacle which started at houses over £1 million and then quickly was scrapped and turned into one for houses over £2 million.
David Cameron: Whilst not outright wrong his continual reference to the “jobs tax” may well have been politically successful (or not) but it gave the appearance of a real economic debate when in fact it is relatively minor player.
After starting off as a party of fiscal austerity there was a noticeable weakening of this policy and now I have to confess I am not entirely clear what the policy actually is.
What will happen?
As no party has given any clear plans about its public spending cuts I expect in practice to see tax rises. At the time of the budget I said that I would raise VAT to 20% from April 2011. Whilst no-one has admitted it I expect whoever occupies Number 10 Downing Street to do it. You see the scale of cuts required is virtually unprecedented for the UK and we have weak politicians…
So I suspect that the Beatles may well have been prescient for this parliamentary term.
(If you drive a car ), I’ll tax the street,
(If you try to sit ), I’ll tax your seat,
(If you get too cold ), I’ll tax the heat,
(If you take a walk ), I’ll tax your feet.
The Nature of power and authority
There has been an interesting story running over the past month or so which reflects I think on the nature of power and authority. This is what has been happening to the Prudential which is an insurance company listed in the UK. For those of you unaware of it then it is a company reasonably well-regarded which has existed for 150 or so years and has recently performed well . It has a new chief executive who has plans to completely transform the company and in effect move the vast majority of its business to the Far East. I wish to just consider the generics of this.
You see which of the two following alternatives was he given the job to do by the shareholders?
1. Run the company as well as he can, to make decent profits, to try to grow the company and to hand a well run business to his successor. Or
2. To fundamentally change the business out of all recognition in a very short period to transfer it in effect to the Far East and effectively abandon the businesses which have given it such strength over 150 years.
Now as you may be aware there are weaknesses in the deal proposed (many of the assets could have been bought much more cheaply a year ago) but if we return to the generics I think it poses a fundamental question and goes to the heart of a problem which was one of the causes of the credit crunch and the world-wide recession. I think that Chief Executives and Boards have taken over powers that belong to shareholders and the system needs to be reweighted. Our system of joint-stock companies has seen shareholder power in effect be reduced and it needs to be strengthened. The reason for this is I am afraid simple human nature combined with greed, there is a clear incentive for Chief Executives to gamble for the prestige and rewards they would get from success. I have pointed out before they are very rarely punished for failure. We have asymmetry and moral hazard again. We must try harder and do better.
There is a reason why I have introduced this subject today. You see I feel that this applies to politicians and electors too. In effect I feel that they have exceeded their authority. It is easy to commit taxpayers to deals with considerable financial implications when the majority of taxpayers do not understand what is happening. I think we need a change maybe something along the lines of the German Constitutional Court but certainly a limit to political power. Look at Greece and what her politicians have done to her financial position. Run me by who of the guilty has been punished or even brought to court? Asymmetry and moral hazard abound.
I will update on Greece later as much is happening but I wanted to get my view on the election process out promptly today.