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Choosing Triumph or Tragedy for Britain’s Economy
by John Brian Shannon | November 21, 2016
In this new century every country has its challenges. And these days, even advanced nations like Britain are challenged to balance the books while still providing the services that citizens depend on, and international partners expect.
No Worries. It’s easy as pie!
But we’ll get to the pie charts later. For now, let’s sketch out some broad outlines that a vast majority of people probably agree on.
And number one on the list must be that rich countries shouldn’t be running budget deficits. Ever. With the possible exception of major national emergencies or God-forbid, another World War. Other than those caveats, there is simply no excuse good enough that G7 nations should be running budget deficits. Full stop.
Ours is the most advanced civilization the world has ever known, we are literally swamped in knowledge and technology, and our ability to communicate and trade with other nations is almost limitless.
Why then, do developed nations have budget deficits that have piled-up over the decades to the extent that some nations have debt levels approaching 260% of GDP? (NOTE: Government debt is merely the total of their accumulated deficits)
It’s a very good question and the answer is; WWI, WWII, the Cold War, assorted other wars like Vietnam, the 1990 Gulf War, the Iraq War and the Afghanistan War — all of these required massive spending on a buy-now/pay-later basis.
For one example of how costly this is, the total interest payments just to service U.S. government debt since deficit spending began, equals $2.5 trillion dollars.
Here are the highlights from the U.S. Debt Clock (courtesy of the U.S. Treasury)
- U.S. total national debt — $19.8 trillion
- U.S. debt per citizen — $61,131
- U.S. debt per taxpayer — $166,240
- U.S. budget deficit — $590 billion (when calculated using GAAP rules, this number totals $5.6 trillion)
America alone spent one trillion dollars on the Iraq War.
For one trillion dollars (from the year 2000 through the year 2050) every unemployed American citizen could have been given a job paying them $50,000/year for their entire working life, and each kid who couldn’t afford to pay their university tuition themselves could have gotten one baccalaureate degree paid for by the U.S. government, and each U.S. citizen living on welfare could have been paid $25,000/yr to keep the mailboxes on their street clean and painted, and the sidewalk swept. With quite a few billion dollars left over by the time 2050 rolled around.
Instead, all of the money spent on war by the United States was borrowed money that will never be paid off — and American citizens will be paying the interest indefinitely. Forever is a long time.
See this snapshot on U.S. government debt. Scared yet?
For comparison purposes, the population of the United Kingdom is almost exactly one-fifth of the United States. Below is a snapshot of Britain’s deficit and debt picture.
- Britain’s total national debt — £1.7 trillion
- Britain’s debt per citizen — £28,589
- Britain’s debt per taxpayer — £49,174
- Britain’s budget deficit — £19.1 billion
At the moment, the UK government is doing three things well to help Britain’s economy
The brightest spot for Britain’s economy is the already-passed legislation requiring that all central government budgets be balanced from 2020-onward.
Another hopeful sign is that Philip Hammond, Chancellor of the Exchequer, has devoted £1.3 billion to a road building plan in his recent Autumn Statement, thereby allowing thousands of workers to continue working, and adding hundreds of presently unemployed workers to the workforce.
In the creative accounting department, workers can now save some money and their employers can save even more — while both avoid some amount of National Insurance cost compared to the existing calculation method, via the so-called ‘Salary Sacrifice’ method.
While these seem to be small (but brilliant) improvements to the UK economy, it’s important to remember that the Theresa May government is less than 130 days old. And although these are baby steps, they are positive and add certainty to Britain’s economic outlook.
More fiscal and monetary levers need to be applied than that however. And importantly, countercyclical policy must be employed as a long-term economic lever throughout the British economy, with special emphasis on creating employment during economic downturns.
What else could be done to help Britain’s economy?
Quite a lot.
Every government in the world needs money to operate, and the taxes gained from personal income tax are already too high (just ask any taxpayer) while higher corporate taxes are detrimental to attracting business to your country.
Four quick ways to supercharge Britain’s economy
a) Match Canada’s lowest-among-the-G7 corporate tax rate
b) A 5% tariff on every imported good
c) Massive infrastructure spending programme equal to annual import tariff revenue
d) Legislation permitting up to 5% of electrical demand in each UK county be met with clean coal
Still bound by EU trade laws over the next (approx) 36 months, how can Britain excel economically?
a) One of the reasons that Canada virtually breezed-through the financial crisis of 2009-2012 is that it had the lowest corporate tax rate in the developed world, it ranks well for ease of doing business, and it has a streamlined process for existing businesses to relocate to Canada allowing corporations to easily move to a lower corporate tax rate — all of which worked to keep Canada on an even keel throughout the global financial crisis. (Not world-changing, but ‘just enough’ to get the job done for Canada)
In retrospect, during the boom times, a low Canadian corporate tax rate represented a slight loss in revenue for Canada, but during the recession the low corporate tax rate promoted many relocations to Canada — when they weren’t prevented by President Obama, that is.
In the case of the Burger King fast food chain, it decided to relocate to Canada in order to save billions in corporate taxes, however, the U.S. President decided to block the move. Although I’m still a fan of President Obama, it teaches us that there are very real limits to the benefits of low corporate taxes, due to market interference by politicians that say they believe in free markets, but don’t. And there are many of those.
Still, a low corporate tax rate that matches the Canadian rate would attract new business to Britain. There will be times that such moves are overruled by faux free trade governments, but on the main, Britain would gain more than it would lose by matching Canada’s corporate tax rate.
Yes, the UK government would lose some amount of corporate tax revenue in the short-term. However, that is balanced-off by the hundreds of new businesses that would relocate to Britain over the long-term — possibly even from Canada which can’t compete with the astronomical level of economic activity in London, nor a prestigious London address.
Inclusive in the term free enterprise with free markets, means that corporations are free to set their headquarters anywhere they want.
Where to recapture that corporate tax revenue loss and add billions more revenue?
b) The most efficient way for Britain to recover that short-term revenue loss and to gain billions more revenue, is by instituting a 5% tariff on every good that arrives in the country.
If Britain and her trade partners agree to the same 5% tariff and a standardized list of exemptions in their own countries, there will be nothing to fight over.
On a personal note, because I happen to believe that knowledge is the solution to all problems, I have a problem with taxes on books, whether they are books printed on paper, recorded on DVD’s, or are purchased as E-books.
Similar applies to those medicines that save lives. Such things should be exempted from all forms of taxation, including tariffs. Everywhere on the planet.
By instituting a nominal tariff of 5% Britain would also make imported products minimally more expensive, while Made in Britain products would become more cost-competitive. British manufacturing (jobs) would see an uptick and sales (profits) would increase.
NOTE: Not to make this too complicated here, but many of Britain’s exports are high-end items. If there happens to be a 5% tariff placed on British goods in other countries, don’t expect it to stop foreign buyers from purchasing an Aston Martin, for example.
At the other end of the market, low-end items such as imported T-shirts which typically sell for £1.40 will not be much affected by a 5% tariff. However, it would be reasonable to expect an uptick in the sales of UK manufactured T-shirts. (In a perfectly efficient UK T-shirt market, a 5% sales increase in UK manufactured T-shirts could be expected once the foreign manufactured T-shirt inventory is sold off)
Obviously, both the pricey and the least pricey items wouldn’t be much affected by a 5% tariff (for very different reasons) but foreign manufactured items in the middle price ranges will be the items affected, and the market would see a corresponding rise in the sales of UK manufactured items. Things like computer monitors, home exercise equipment, and food processors, for example.
A 5% tariff would raise uncountable billions of pounds sterling for the British government — exactly in the time of deficit elimination, and as unprecedented immigration levels have increased unemployment among blue-collar workers in Britain, and as Brexit roils the markets, and as a potentially protectionist U.S. administration is crowned.
In short, there is every reason for Chancellor of the Exchequer, Philip Hammond, to create a minimal and standardized tariff structure (that all of Britain’s trade partners could buy-into) means that it could be passed immediately if EU parties agree thereto. Otherwise, it can’t begin to take effect until the day after Brexit occurs.
Even so, there’s no reason that the legislation couldn’t be researched and written now, ready for Day One of post-Brexit Britain.
I can’t emphasize it enough. The Chancellor of the Exchequer and the Prime Minister must SELL their trade partners on this tariff, proving that it will be a net benefit to all of Britain’s trade partners. (If a mild tariff can do all that for Britain’s economy, it can do the same for EU nation economies)
In the absence of convincing EU trade partners of the wisdom of this plan, three years of tariff revenue will be lost — revenue that could have been used to dramatic effect in the UK economy.
c) While Philip Hammond’s £1.3 billion road building plan is a good one, it needs to be upgraded to a £130 billion national infrastructure plan.
So much of Britain’s infrastructure — from roads and bridges, to trains and trams, to airports and seaports, and to significant other structures and buildings — need replacement, repair, or major upgrades.
It could even save money over the long-term. In the case of many of Britain’s old government buildings, due to their obscene electricity consumption and inefficient insulation, some old buildings cost millions of pounds per month to light and heat.
Building new, Zero Net Buildings, means that they produce as much energy as they consume over the course of the year, saving millions of pounds sterling annually.
Retrofitting older structures isn’t quite as efficient, yet can still save millions of pounds annually.
Millions of British jobs would be created over 10-years and all of it paid for by a tariff on imported goods.
(Yes China, the U.S., and other UK trade partners, please export more stuff to Britain, as we need the tariff revenue!)
The tariff could easily provide enough funding to accomplish all of this and more, once Britain is running balanced budgets.
d) Legislation that permits up to 5% of electricity demand *in each UK county* be met with clean coal, means return to employment for thousands of coal miners, it means the construction of hundreds of small, clean-coal power stations, and it means that an amount of reliable and cheap electricity equal to the demand of all government buildings is sourced, produced, and sold — in Britain, for Britain, and by Britons.
Allowing 5% of demand per county to be met with clean coal power stations ensures that the country can stay on track to meet its international CO2 commitments and avoid the negative healthcare costs associated with behemoth scale coal power stations located near major population centres.
These are simple ways to attract new business to Britain, to increase revenue for a government still on the mend from the global recession, to create jobs and increase profits for the construction, manufacturing, and coal mining and coal-fired generation segments of the economy, and to add much-needed stability to the UK energy grid.
Instead of waiting to do it all after Brexit — and who knows what might happen to the global economy in the meantime — it’s better to take Britain out of its economic shackles, now, proactively, and with vigour.
The Chancellor of the Exchequer, Philip Hammond, has made some deft moves in recent days. Let’s hope this is the beginning and not the end of this trend.