What is the economic monetary and fiscal policy of the UK Independence Party?

It was only on Friday that I discussed the fact that what were previously considered to be the main political parties in the UK shared one thing which was dissembling about how they would deal with the UK fiscal deficit problem. I also pointed out that there is a new kid on the block which has posed a challenge to them especially now that UKIP (United Kingdom Independence Party) has actually won two by-elections. Added to this the three electoral polls published in the press yesterday showed UKIP to be at 19%,16% and 15% respectively. If we add this to the fact no party looks likely to win a majority it is far from inconceivable that a party which until recently had no MPs (Members of Palrliament) could be part of a coalition government next May. So it is time to examine its economic policies and for newer readers the rules here are that I express no political view and simply examine the economics.

Monetary policy

This is a subject close to my heart and accordingly regular readers will not be surprised that I noted this in April 2013 when UKip party leader Nigel Farage wrote an article in City-AM. In it he rather echoed the Japanese Prime Minister Shinzo Abe as he repeated at least some of what has been called Abenomics.

That is why I want to be the first UK political leader to commit my party to changing the Bank of England’s mandate.

Nigel Farage also echoed Abenomics with his promise of other changes.

Altering the mandate of the Bank of England is just the first of those fundamental changes we need to make.

If we look for some policy meat on the bone then the paragraph below gives us more than a few hints as to what would be required and the emphasis is mine.

The mandate of the Bank has been focused on avoiding a repeat of the last crisis, instead of addressing the root of the problem we face today. Its negative focus on fighting inflation is put to shame by the positive objectives of the US Federal Reserve’s dual mandate that it “shall maintain long-run growth of the monetary and credit aggregates, commensurate with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” That is the language of Ukip economics – maximum employment, growth, and a positive outlook.

What does this mean?

Firstly I am sure it will come as a surprise to many that UKip policy is in monetary terms very expansionary. At that point the US Federal Reserve was still expanding its QE (Quantitative Easing) operations and was the most expansionary of the main central banks with monthly purchases totalling some US $85 bIllion. If we take Nigel Farage at his word we must assume he was suggesting that the Bank of England should itself have been conducting a more expansionary policy back then which presumably would have meant re-starting its own QE purchases.

Here we have an immediate problem as this policy prescription would have opened the QE floodgates just as the economy was picking up anyway! I have been very critical of the Bank of England Governor back then Mervyn King who was voting for more QE for the reason that his policy prescription would have given a booming economy a boost and maybe overheated the housing market (even more). My view is that the policy was inappropriate.

Added to this is something of a problem as a party which presents itself as revolutionary and on the side of “the struggling people of Britain” prescribing QE which if it is on the side of the people it has had a very odd way of showing it! The consequences of QE has involved increased inequality, more feather-bedding for the banking sector and a distorted economy. I do not know about you but that hardly seems to be much of a help for people who are struggling.

Next comes the implicit downgrading of an inflation target. Back then the US Federal Reserve was explicitly nudging it’s from 2% to 2.5% with some members arguing for a 4% target. There was no specific prescription in Nigel Farage’s article but there was a clear hint that he would accept more inflation in return for extra growth. Sadly such a choice is much more rarely available in real life than in economics textbooks. Also inflation expansionism is something which when the Bank of England pursued it in 2010/11 led to economic pain via for example its impact on real wages a problem that is still with us.

What is its fiscal policy?

If we look at the UKip website we do see some more echoes of Abenomics as there is some fiscal expansionism on show here. However some care is needed as the expansionism is mostly via tax cuts as shown below.

UKIP will support a personal allowance that is equivalent to full-time minimum wage earnings – expected to be around £13,500 by the time of the general election.

Also those higher up the wage scale will get an extra boost on top of this.

At the last Budget, UKIP said that our policy would be to raise the 40% tax threshold to at least £45,000. Well, today we are able to make a better offer.

The policy we will take into the next parliament will be to cut the 40% rate where it starts to 35%. So a 35% rate would start at earnings just above £42,000 and apply all the way up to £55,000. Only at earnings of £55,000 would the 40% rate become payable.

This would be a staging post to a situation where the position would be as shown below.

An eventual tax structure of a personal allowance at the level of the full-time minimum wage, followed by a 20p standard rate, a 30p intermediate rate and a 40p top rate would be simpler, flatter and in my view compatible with both a dynamic economy and a fair society.

As you can see there would be quite a boost to the UK economy from this. At least initially we would see a further fall in the UK income tax take which would see our fiscal deficit rise further. Also there is another tax cut planned.

Well, let me tell you what UKIP wants to do to inheritance tax; scrap it altogether

According to the House of Commons library inheritance tax was expected to raise some £3.3 billion  last year.

In terms of expenditure we have received various promises of more which are hard to quantify. For example what does this mean in practice?

We will resource fully our military assets and personnel.

We have also seen promises around the NHS (National Health Service) and the police which look extremely likely to raise spending but are so far unquantified.

There are some cuts planned

In general UKip intends to finance as much as possible from spending overseas in particular from the European Union and also from the UK aid budget.

UKIP will leave the EU and save at least £8bn pa in net contributions.

– UKIP will cut the foreign aid budget by £9bn pa, prioritising disaster relief and schemes which provide water and inoculation against preventable diseases.

Also in an unashamedly populist move it targets two of the main policy props of the UK political class.

UKIP will scrap the HS2 project which is uneconomical and unjustified.

– UKIP will abolish the Department of Energy and Climate Change and scrap green subsidies.

There was a suggestion for a luxury rate of VAT but there seems to have been some controversy over this and I am not sure if it is still in play. Also UKip is in favour of a turnover tax on big businesses as a response to our reduced tax take in this area.

Every major company would have to show it had paid a set proportion of its turnover in corporation and other taxes or would face an additional charge to bring it up to the minimum.

Comment

One factor that I wish to make clear is that all the party manifestoes have obvious weaknesses and contradictions. We are continually told how intelligent our political class are which of course is immediately contradicted by their actions! However if we return to the economic policies of UKip the outstanding one to my mind is not the obvious but rather the espoused monetary expansionism. Of course Nigel Farage will be far from the first politician to suffer from a case of bad timing but QE is hardly for the people.

Added to the hints of Abenomics comes if you like some Reaganomics where there are a swath of tax cuts including some sweeping income tax cuts. These (presumably) would according to UKip be financed by cuts in our payments to the European Union and our foreign aid budget. Also there are more than a few spending promises which make one wonder why we would need such monetary expansionism.

One though I have about this is that the monetary expansionism would likely to involve a fall in the value of the UK Pound which sits oddly with the theme of the party itself.

Finally I have two nuances for you. Firstly critiques of UKip policy should have the rider that the polices of the other political parties rarely make a coherent plan either! Also UKip’s first MP Douglas Carswell would have to undergo a second road to Damascus style conversion to espouse the monetary policy indicated. So some things we do know but some we do not.

Advertisements

26 thoughts on “What is the economic monetary and fiscal policy of the UK Independence Party?

  1. Hello Shaun ,

    Perhaps you should have put your caveat at the top 😉

    on pure economics we should judge all parties by their actual methods once in …

    Ok UKiP hasn’t been voted a Government ( yet) but the point is that what ever they say the voting public doesn’t believe a work of it except somehow when it comes to tax back for them !!

    And all parties know this – this goes back in part to you previous posts about the promises upt o the next election – expect a lot more cotton wool!!

    Frankly I suspect the next round of economics to be very loose , loose indeed !!

    Forbin ,

    PS: “it aint what you you do , it the way that you do it !’ Banannarama

    PPS: Oil did rally and I see , at least according to MiniTru that Russia will try to cut supply to raise prices – shame I never seen OPEC as a really coherent bunch and follow through them selves – we shall see 😉

    • Hi Forbin

      One of the themes here is that the UKip policy prescription seems to involve as much fantasy economics and wishful thinking as the rest of them! A curse on our political class…

      Oil has managed to nudge above US $80 for a barrel of Brent Crude and as I type this is hanging there by its fingernails. As to Russia it was not the best of days for BBC analysis as I pointed out on Twitter.

      Er the Rouble has rallied 2% today! RT @BBCBusiness VIDEO: Why does the rouble keep sliding? http://bbc.in/1yMk9cG #BadTiming

      Keep sliding was a bit much on a strong day for it….

      As to OPEC the fracking era has weakened it further, maybe they will accept lower prices for a while in an attempt to squeeze the frackers out of business. It would hardly be the first time that an oligopoly has behaved like that would it?

    • “PPS: Oil did rally and I see , at least according to MiniTru that Russia will try to cut supply to raise prices – shame I never seen OPEC as a really coherent bunch and follow through them selves – we shall see ;-)” Hmm wel I’ve got Brent Crude at $79.60 and of course West Texas Intermediate at less – http://www.bloomberg.com/energy/??

      I don’t think OPEC are coherent in terms of following Russioan orders iof that’s what you mean. I’ve stated before the Saudi’s are pushing this:
      1. to hurt Iran
      2. to possibly try to hurt US fracking operations – good luck with that!

      3. possibly to hurt Russia due to Ukraine issues.

      Oh and have you seen Saudi reserves? – https://twitter.com/SoberLook/status/534879449091940353 they can keep this show going for a long long time…..

  2. I think Carswell is the key.Farage may step down after 2015 and DC will have a lot of Ukip backers.There’s a strong libertarian element in there that’s been subdued since Godfrey Bloom left but it’s there still.

    • Hi Dutch

      You make a good point and I have raised the policy differences on twitter to see if it gets a response from them. Of course UKip would be far from the only party with policy differences between its leaders.

  3. Great column, Shaun. I am not sure redefining the mandate of the Bank of England would be such a big deal, although clearly it would be if it meant even more expansionary monetary policies than the UK has had under Governors King and Carney. The closest the Bank of Canada Act comes in its preamble to mentioning price stability is this: “to mitigate by its influence fluctuations in the general level of production, trade, prices and employment”. There have been proposals to change the Bank of Canada Act to make “price stability” the primary objective of monetary policy but nothing has come of them so far. Just the same, it has not interfered with the Bank of Canada adopting and generally adhering to an inflation targeting regime, at least until Mark Carney became its governor. By the way, the inflation rate exceeded 3% in ten months while Mark Carney was governor, more often than under any of his predecessors, although he served for less than five years, and all other governors from Thiessen through Dodge served for seven.

    • Hi Andrew

      There is an irony in that as some central banks (are you reading this BoE?) who are supposed to be pure inflation targeter’s have ignored it and one which isn’t maybe has. Although the Bank of England has now joined the group with a secondary output requirement which of course becomes primary quite often in these troubled times.

      Oh and to be fair to the Bank of Canada they do at least mention disinflation and take the trouble to distinguish it from their definition of deflation.

      http://www.bankofcanada.ca/wp-content/uploads/2010/11/disinflation_deflation.pdf

      In the UK Mark Carney is seeing an undershoot of inflation but whilst many not doubt will the reality is that it has had little to do with him. Indeed one of his recent appointees Kristin Forbes is pretty much calling for a lower £ which if you doubted her lack of Uk experience being relevant well doubt no more.

  4. Shaun,

    Thanks ofr digging aorund and finding some policies. They are contradictory (QE at least) to his championing of the people against the status quo of “the system”. I guess that they have not yet thought it all through yet….. Saving the EU contribution and the overseas funds, whilst significant dobs of money they are not the cure-all of the rest of the financial problems. Farage will have to identify some groups who WILL suffer for his reformation, and that is where politicians get very quiet near elections.

    We shall see.
    Paul

    • Hi Paul C

      I had followed the championing of QE style polices in the normal course of my interest in them. Perhaps it was just grandstanding but now of course as you point out the real scrutiny will begin and the media will not always look at UKip through the immigration and EU microscope.

      Some of this is how a political party develops but with the likelihood of minority/coalition government looking high even a small number of MPs could provide genuine political power.

  5. Shaun,
    Leaving the politics aside some things seem apparent viz

    20% appears the tax threshold ( lower band income tax, VAT etc)
    Consumption taxes appear easier than income tax to collect (although Stamp duty receipts currently under forecast!)
    Zero hour contracts minimise Employer NI contributions whilst allowing wage bill control/flexibility.

    I suggest HMG has data regarding VAT receipts that could be used to ensure the Corporate sector pays its dues – eg allow Employer NI contributions to replace debt payments as tax deductible and ensure the 20% target met by all companies.
    HMRC should concentrate on UK based £ transactions disallowing any other expenditure for tax purposes – if Starbucks etc want to pay fees to Luxembourg so be it .

    Can I invite other suggestions ( besides ” I am only dreamin!”) and possible unintended consequences of my ideas?

    • Hi Chris

      I like the idea of employers NI being tax deductible as in hopefully it would encourage employment and as you say perhaps weaken the trend to ever lower wages at the bottom of the distribution. My only concern is the size of it might stop most employers from paying any tax. The total NI take is £107 billion and whilst a decent slug will ne paid by employees that leaves a lot for employers.

    • “…eg allow Employer NI contributions to replace debt payments as tax deductible…”

      I don’t understand this, employer NI conts (13.8%) are tax deductible as is interest on debt repayment. What are you trying to achieve by disallowing interest repayments?

  6. I don’t think UKIP voters in general care a flying monkey’s about economics other than “it’s all the fault of EU/Poles/Pakis”.

    Sorry but that’s the terms anyone who favours them has spoken to me in.

    The red tops have done their job well…:(

    • seems mentioning to collegues that I’ll vote for them brought the response I was voting to have the Nazis back !

      They were committed Labourites I think

      anyways thats politics and pollies lurve all the FUD they can get

      Economic wise I suspect the Too Big To Fail Banks will run the show as normal , no matter who gets “in”

      Forbin

  7. We could have a wonderful coalition next year in which either UKIP or the SNP are king makers and will want their pound of flesh. A case of voters getting what they deserve not what they need.

    On the subject of immigration I find it odd that all parties appear ready and willing to bash EU immigrants when all the studies I have read agree that their net contribution has been positive. All the Poles and Latvians etc that I know of appear to be hard workers and integrate well. Trying to change one of the fundamental rights of the EU was always going to be a no win situation for the government.

    On the other hand the majority of immigration is from India, Pakistan and collectively Africa and here the surveys all show that the benefit to the economy has been negative. Many of these people do not integrate for cultural or religious reasons and generally it is these immigrants that people refer to when they complain about excess immigration. Non EU immigration is something that the government can tackle. So why have they picked a fight with the EU? It baffles me!

    • It was not my intention to bash any ethnicity’s contribution; i like the fact that Eastern/Central Europeans have helped bring down inflation by cheerfully doing jobs at £10/hr that surly Brits botch for £60/hr.

    • Hi Pavlaki

      Coalition government can be an odd beast. If we stick with Scotland there seems to have been a big swing from Labour to the SNP. But I was reading at the weekend that maybe they could form a coalition. So voters who switched get the same government anyway?! It is hard to see that going down well….

  8. UKIP cannot have even a thread of libertarianism and promote QE, but I don’t think voters want coherent economic policies , basically the vast deficits buy the votes of those receiving entitlements and this includes state employees, too big to fail derived deficits buy campaign cash from the cronies.

    Whoever ‘wins’ the election policies in 2016 will be the same because there is no recovery and whether you rip the plaster off or soak it in the bath – it’s the wound that’s important , and you need to see the wound for what it is to assess the healing.

    (the wound is a monstrously large government that has no idea what it is doing)

    • Hi therigel and welcome to my corner of the blogosphere

      I agree that we desperately need political reform. My longstanding suggestion is that members of the Monetary Policy Committee should be elected. They have more power than your average cabinet minister let alone MP!

      • Well we have recently seen police chiefs become elected and all it did was create party candidates , which I fear has politicized the police (via the lowest turnout ever) – MPC elections would get an even smaller turn out.

        not a fan of technocrats either, with such a lack of knowledge in the electorate it might be impossible to be electable and capable of doing the job…… I am an anarchist so people can do whatever they like – just don’t make me pay !

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s