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.
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.
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.