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Like many Western nations, the UK economy remained resilient through the worst of COVID when many workers were ill or otherwise sequestered in their homes, unable to work due to various lockdowns. The lockdowns seemed a wise precaution for the times — even though Britons disliked being forced to stay in their homes for weeks or months.
But just as COVID has relaxed it’s hold on our lives, it suddenly occurs that Western economies begin to underperform…
Some days you just can’t win.
New UK Prime Minister Liz Truss and New Chancellor Kwasi Kwarteng Ordered Tax Cuts for Wealthy Britons
Which, if you know British politics, is standard operating procedure for Conservative-led governments. No matter the economic ailment, it seems that the de rigueur prescription is tax cuts for the rich.
On balance, that prescription boasts a decent success rate. Over the past 122-years, various UK governments have imposed tax cuts to stimulate the economy and it’s worked more than not. However, there’ve been times when it hasn’t worked, and this is one of those times.
“Always worth a try?”
I guess. But when tax rates for the wealthy are already low, further tax cuts don’t impress the wealthy, nor increase government tax revenue, nor stimulate the UK economy.
And this is the problem… politicians don’t understand economics well (nor do they understand military matters, but that’s a story for another day) but by taking some sage advice to heart, new Prime Minister Liz Truss could still salvage an economic win out of a (forgivable) misstep early in her premiership.
It’s early days, and no doubt, they’re feeling the pressure to act. The PM and Chancellor tried to improve the economy and their first attempt failed.
No worries, there’s a window of time to get it right. But not too much time, or any remedy they apply will arrive too late to have a meaningful effect. And that could cost the Conservatives at the next election.
Their Second Attempt to Help the Economy: Printing More Money and Government Buy-back of UK Bonds
Better. But not perfect.
Which necessitates a larger government deficit, morphing into more government debt. Just what the UK economy doesn’t need is a larger deficit and even more debt. Neither helps the market, nor the government’s credit rating, nor the UK’s long-term economic picture.
It’s too soon to see if this plan will work. But it works in other countries, and it should work in the UK, with the caveat that the privilege isn’t abused by future Chancellors as a sort of ‘silver bullet’ that will solve every economic problem. It’s not a magic bullet.
Printing money and buying back bonds will have a small, but positive influence on the overall economy. Likely, both the PM and the Chancellor now realize that it should’ve been the first step in a 6-step programme to address problems and provide solutions to the UK’s present economic challenges.
Five More Ways to Lift the UK Economy and Prevent (or limit) a UK Recession
ONE: Working people pay more tax than unemployed people. It’s a fact. Ask any economist.
Therefore, the government should spend serious stimulus money (even though it’s borrowed money) on ‘shovel-ready’ infrastructure projects. But it shouldn’t spend on projects that can’t begin construction within the next 8-months, because that’s too far in the future to fix what’s broken now. ‘Shovel-ready’ means ready to begin digging within weeks. Not years.
TWO: Companies that export goods or services, bring ‘new’ money into the economy, thereby stimulating the overall UK economy.
The domestic economy in the UK is pretty sophisticated so there’s little room for improvement — but there’s plenty of room for improvement in regards to exports. The UK’s track record on facilitating an export-driven economy is dismal when measured against such exporting superstars as Germany and Japan. To correct this, the UK government must provide a tax advantage to companies or individuals that export goods or services. I politely suggest an 8% tax break on exported items. Five per cent won’t incentivize companies enough to make exporting a priority, and ten per cent would make it difficult for the government to recover the lost tax revenue over a number of years, no matter the increase in exports over the short-term. This 8% tax advantage could be raised or lowered annually, thereby providing the government with yet another lever with which to control (adjust) the UK economy as necessary. Priceless!
THREE: Citizens earning less than £25,000. per year contribute little to overall UK government revenue, so there’s little loss for the government to forego taxing them.
However, changing the income tax threshold so that workers who earn under £25,000. per year don’t pay any income tax whatsoever, can make a huge difference in the lives of those workers! It’s the difference between a presently unemployed person being able to afford to take the train to a job every day, or not. It’s the difference between a presently unemployed tradesperson being able to insure his work van, or not. It’s the difference between a presently unemployed worker being able to afford daycare for her children so she can apply for a job, or not. It’s the difference between a presently unemployed person moving to another city for a job, or not. In so many ways, this change represents a small change in government tax policy and revenue — which results in a large change in the employment situation for presently unemployed workers. The UK workforce needs to be firing on all eight cylinders, not the present five-out-of-eight cylinders.
FOUR: The UK should harmonize it’s Corporate Tax Rates and policies with Canada, which has an attractive and simplified corporate tax structure.
And it works. Throughout the entire subprime market crisis and subsequent recession, Canada’s economy was the strongest of all G7 economies and Canadians only knew about the recession playing out in the United States and Europe by watching American news channels. The reason Canada sailed through the recession is precisely because of their low-ish and simplified corporate tax rate structure. Many Western companies moved to Canada in the 2008 to 2011 timeframe in order to take advantage of those low corporate tax rates — and in so doing — saved their companies from insolvency. Some returned to the United States following the economic recovery, while some remained in Canada. You can’t buy advertising like that! Recessions occur approximately every 25-years in the Western world, and the next one is almost upon us. Now is the time to make the UK’s corporate tax rate as favourable as Canada’s, and reap the benefits thereof. Doing it after the looming recession hits, means that the UK must wait for the next recession 25-years hence, in order to reap the benefits and bragging rights of lower and simpler corporate tax rates.
FIVE: The UK government should finance 10 Solar Panels on every UK rooftop (via loan guarantees to banks) to add capacity to the national grid, to provide significant energy cost savings to energy users, and to allow for increased energy exports to the continent.
Almost every UK rooftop could host 10 solar panels and thereby add plenty of electricity to the grid during the daylight hours — which, happily, is when the grid faces it’s peak demand. Because rooftops are everywhere in the country, it won’t matter if some northern panels are covered with snow, or if London happens to be covered with a layer of fog — because the rest of the country will still receive sunlight and contribute huge amounts of electricity to the grid. Ten panels per rooftop means that homeowners can (automatically) sell their surplus electricity to the grid via a net-metering connection. Whether private homes, farms with several outbuildings, schools, retail businesses or industrial buildings, placing 10 solar panels on each rooftop in the country could save energy consumers astonishing amounts of money annually, and add significant capacity and stability to the national grid, and allow MANY GIGAWATT HOURS worth of surplus energy to be exported to the continent.
So there’s the low-hanging fruit. There ARE WAYS to improve the UK economy, not by giving tax breaks to the wealthy — who, it turns out, don’t want them because they’ve all the tax breaks they need — but by strengthening the parts of the UK economy that are presently weak, and could be made robust via simple changes to existing policy.
I’m proud of the new Prime Minister and her Chancellor, because, facing a looming crisis, they decided to actually DO SOMETHING! as opposed to just hiding until the storm passes.
Full marks on that, Liz and Kwasi! It’s easy to see that you both care about the country and about how its citizens and businesses are faring.
If you continue to be responsive to the peoples’ needs, I’m confident they’ll respond favourably to you, and your poll numbers will prove that statement true as time rolls forward.
Wishing you every success as you craft policy appropriate to the times in which we live and seek to pass it in the UK House of Commons in a timely manner for best effect.
Written by John Brian Shannon
Well, it appears that Coronavirus returned with a vengeance this week, just as I predicted.
The reasons for it’s return are both simple and complicated, and those reasons are; ONE: In the early days of the COVID-19 pandemic Western governments sat around waiting for someone to tell them what to do, and when someone didn’t, they sat some more, allowing the Novel Coronavirus to spread to thousands of people, who then infected many more thousands of people.
Mind you, once medical professionals told Western governments that Coronavirus represented an existential threat to their countries, they moved quickly to direct citizens towards healthier choices such as ‘social distancing’ and the wearing of PPE’s whenever they left their homes and only essential service workers were permitted to travel to and from work. Both modalities were surprisingly effective in reducing further airborne transmission of the disease.
TWO: A good example of the complete lack of personal responsibility shown by some is represented in the photo below, taken only days ago when the COVID-19 alert threshold was lowered (slightly) and thousands of people (who obviously AREN’T healthcare professionals) mobbed the beaches, disregarding the recently relaxed Coronavirus social distancing rules.
Consequently, the huge sacrifice made by millions of Britons staying home under lockdown for two months may be in vain!
And many may now catch the disease and perhaps die because a number of Britons lacked the personal discipline to adhere to the (recently relaxed) Coronavirus social distancing requirements!
Let’s hope it turns out that by sheer dumb luck only small numbers of Britons will subsequently catch the disease and suffer or even die on account of the irresponsible actions of those beach going Britons.
Why the UK Needs a Guaranteed Basic Income for the Coronavirus Economy
Due to initially slow response by Western governments (but see the effective response to COVID-19 mounted by South Korea here) and due to the lack of discipline shown by some Britons, it looks like Coronavirus is here to stay for the next two years. At least.
Not only that, but there WILL BE another COVID variant arising this year or next that may prove deadlier than the present Coronavirus pathogen. It’s typical of respiratory viruses that they mutate and those mutations often become more effective at terminating the lives they infect. ‘Nature of the beast’ as they say in virology labs around the world.
So, the economy can’t continue to be locked down and survive Coronavirus indefinitely. It needs real money to be earned, spent, taxed, and reinvested in the whole economy every day of the year.
Consequently, when large numbers of people aren’t working during the COVID-19 lockdown, money stops flowing and businesses begin to die. And that’s terrible for the economy. And it’s even more terrible for individuals who live from paycheque to paycheque as their cash and ‘fridge contents dwindle for as long as the crisis continues.
That’s why it’s no surprise that many headed to the beach over the past few days to gain respite from the living hell they experienced over the past weeks.
See how things are so connected? Demographers see it everyday.
To stabilize the economy and to prevent irreparable harm to persons during this and future Coronavirus lockdowns, the UK needs to institute a Guaranteed Basic Income
Handing huge amounts of taxpayer money to corporations isn’t the answer, as 50% will always and automatically be skimmed-off to add to annual profits and be thence distributed to shareholders — many of whom AREN’T UK citizens, don’t pay taxes in the UK, and may never live in the UK. Which isn’t any kind of pathway forward for the UK economy. So forget that plan.
Putting real money in the hands of Britons is the way forward, especially during times of lockdown, high unemployment, war, or natural disaster. By simply paying adults a minimum income, they can afford to eat, keep the lights on, and keep hope alive for their families for the duration of any crisis or emergency.
Many such facilities already exist in the UK, including all social welfare and Universal Credit spending, food banks, homeless shelters, substance abuse organizations, local charities, domestic NGO’s and foreign NGO’s operating in the UK during the pandemic.
What a GBI means to the UK economy is that all social welfare and charity gets rolled into one payments system — thereby eliminating the many parallel and overlapping programmes that were designed with the best of intentions to, (1) mitigate the effects of poverty on Britons, and (2) alleviate the sudden and unexpected poverty caused by local crises or national emergency.
It means keeping people alive until the crisis has passed (yes, it’s that dire in many cases) so that Britons can then pick up and carry on with their lives after the crisis and once again contribute to the wider economy.
Who Should Get It?
Every adult UK citizen (including senior citizens) who live in the bottom economic quintile and (a) thereby earn less than the annual official national poverty line (about £20,000/yr in the UK) or (b) any adult UK citizen temporarily affected by local crises such as flooding, or national crises such as pandemic, war, or other emergency situations that cause them real hardship; e.g. no money to buy food or find shelter, should automatically be eligible to receive GBI payments.
Non-citizens shouldn’t be eligible for a UK GBI, but should be able to (easily) access enough funds from the UK government to safely transport them back to their country of origin, allowing them to return to their home country until the crisis is over. E.g. A one-time payment of £1250.
How to Pay GBI to Citizens
The best way to pay a Guaranteed Basic Income to UK citizens is, of course, the easiest way. And that is via a reverse income tax, which simply means the UK government issues a monthly credit to individuals via their personal HM Revenue and Customs account to top-up their income to £1250/mo. for as long as they earn less than the official annual poverty line amount in the UK.
As HMRC knows exactly how much you earn due to your most recent income tax form, it’s a simple matter for them to credit your HMRC account to top you up to £1250 for that month and transfer it to your bank account via online banking. Some people may choose to allow HMRC to do this automatically, while others may wish to manually log in to their HMRC account to choose the date they want their GBI deposited into their bank account.
Some may wish to have their GBI payment deposited to their PayPal account. That should be OK too.
UK GBI: Reducing Government Overhead Costs, Supporting Low Income Britons, and Supporting Britons Hit by Natural Disasters/Pandemic, Etc.
Instead of today’s many overlapping and expensive government programmes, some with HUGE overhead costs, a single-payer system would put more actual money in the hands of Britons living below the official poverty line at a lower cost to taxpayers, and to more easily assist Britons during emergencies, again, at a lower cost to taxpayers.
How could it cost less when even more people are likely to receive a GBI, than presently receive Universal Credit?
By eliminating the many costly and overlapping anti-poverty programmes using the single-payer system (HMRC’s payments system) and by dramatically reducing homelessness, drug abuse, property crimes, policing costs, court costs, incarceration costs, mental health costs, and reducing NHS cost of (repeatedly) caring for homeless people or (repeatedly) caring for those injured while engaging in property crimes offences, or who (repeatedly) engage in confrontations with law enforcement, due to the nature of the poverty-stricken life they lead.
A UK GBI Improves the UK’s ‘Velocity of Money’ and Therefore, the Whole Economy!
Economists call the speed of the transfer of money from one person to another, the ‘velocity of money’ and it’s a fascinating thing to examine. But to explain it properly, a short video is required to demonstrate how relatively small amounts of money can revolutionize a village, town, city, or rural area…
Now, for a more detailed look at the velocity of money, see Doug Andrew’s excellent example on the topic of how money really works, which refers directly to the ‘velocity of money’ — also known as MV = Py to economists.
FYI – All these examples are sans tax as they’re simple examples designed to demonstrate how velocity of money works.
But in the case of government stimulus — whether government stimulus paid to corporations (a corporate subsidy, or corporate welfare) or paid to individuals as part of a GBI (a personal subsidy, or personal welfare) every dollar or pound sterling of that stimulus (subsidy) returns to the government via taxation within 11-years — and the government is only ‘out’ by the amount of interest paid on the money they injected into the economy 11-years prior. And that’s why you pay taxes…
By the way, your taxes don’t pay for the full amount that the government lends to the economy, you’re paying tax to cover the interest on the money the government lends to the economy. If it wasn’t done this way (so-called ‘Cost of Use’ of money) your taxes would be much higher.
Therefore, British taxpayers don’t pay the full cost of social welfare programmes via taxation, they only pay the interest on the amount loaned to the economy by the government over that 11-year period.
Now, here’s a secret: Since I took my economics education (U.S.A. circa 1991) that 11-year repayment statistic has decreased to 4.3-years (U.S.A. stat roughly similar to the UK statistic) because the velocity of money has increased so dramatically since then. Ask any economist.
Therefore, the huge cost of homelessness, property crimes, policing costs, court costs, incarceration costs, property and vehicle insurance costs, medical costs, etc., to the economy will always be many times more… than the cost of 4.3-years worth of interest payments on money loaned to the economy by the government to solve those problems! Which means, that after 4.3-years (or thereabouts) the British taxpayer should be in for a tax break — courtesy of the GBI and a much better velocity of money factor. All of which equals a booming economy.
Conclusion: It’s cheaper to pay citizens a GBI than it is to pay for the huge costs of poverty on individuals and on the whole economy!
I love economics. Have a great day everyone!
Why, for the love of God, don’t governments utilize the most obvious solutions to solve their budgetary challenges whenever a global financial crisis hits, instead of defaulting to budget cuts that can appear either inept or mean-spirited?
Finance Ministers don’t set out to craft inept or mean-spirited policies during times of economic crisis, but that’s how it plays out in the media and in living rooms across the country or wherever people gather to discuss the economy.
In the UK, this manifests itself in the names that people call their political parties.
If government austerity cuts don’t affect you, you continue to call the Conservative Party by its rightful name. But if austerity hits you hard, then you’re one of those who’ve taken to calling the Conservatives ‘The Nasty Party’ — and they’ll never get your vote ever again, etc., etc. (Yes, I do empathize, BTW. But that’s not what this blog post is about)
It just depends upon which side austerity hits you.
And budget cuts (at least budget cuts perceived as unfair by a significant percentage of the population) almost always result in either a lost election or loss of parliamentary majority at the next election. Check out those stats! (You’ll see how true that statement is)
Theresa May’s ‘hung Parliament’ election result in June 2017 is 100% attributable to the UK austerity budgets that have been in effect since 2010, and hers is just one example out of many majority governments around the world that have suffered as a result of their austerity policies.
There IS a Better Way!
Due to market conditions, about every 25-years a recession comes along in the capitalist countries. You can almost set your clock by it. It’s the ‘nature of the beast — carry on’ is how recessions are described by economists, and nobody tries to prevent recessions, as such ‘resets’ help to prevent even worse economic crashes in the future.
Still, there’s a way for countries to survive economic downturns WITHOUT shooting themselves in the foot every day of the recession. (A novel idea!)
The public knows an economic downturn when they see it. In fact, they have enough experience in their own lives balancing family finances when times are good, let alone when domestic financial challenges appear such as a job loss or (suddenly) another mouth to feed. Therefore, they know the government must compensate whenever the country faces a financial challenge.
The question for governments is how to do it and not lose the next election. Or the one after that.
And the answer is; To do it fairly.
That is; Apply cuts that will be perceived as ‘fair’ by a majority of the public — instead of deep cuts to some departments while other departments see no cuts at all, or worse, are able to increase their spending.
Does it seem fair to you while in recession that Health or Education should receive deep cuts, while spending on the military or the environment is unaffected? (I’m just using hypotheticals here for an example. Every Briton knows their military is chronically underfunded and few begrudge the UK military being exempted from budget cuts)
Back to the subject at hand; Every department in practically any organization on the planet has 5% ‘fat’ built-in to it. It’s just the way of organizations.
Budgets tend to be tightly managed in the first few years, then, over time, surpluses accrue or unused properties aren’t sold off as quickly as they could be, or in other ways there’s potential for either budget savings or revenue increases. Or, depending on the department, perhaps a combination of selling off unused assets and departmental savings could meet the new budget targets set by the government.
If you’re a large organization like the UK government and you expect your revenue to fall by 7% (for example) here’s the way to do it fairly!
Simply inform your departments of the 7% budget exigency, and instead of arranging deep cuts for some departments and zero cuts to others which sets the seeds for future electoral defeat, inform all departments to cut their budget by 7% — or alternatively — tell them to find ways to increase their revenue by the shortfall amount.
Let me be clear, if former Chancellor of the Exchequer George Osborne had simply told every government department in 2010, “We’re facing a 7% (or whatever percentage) cut in revenue, therefore, each government department must cut 7% from their annual budget until further notice,” each department would’ve done exactly that and hardly anyone would’ve noticed. (Remember, every organization/department already has 5% ‘fat’ in their system, so only a 2% budget challenge remains in this hypothetical example. At that point, accounting for the final 2% equates to selling off surplus real estate assets until that amount is obtained)
On the other hand, some departments might be real estate ‘heavy’ and could counter their entire 7% budget challenge by simply unloading their surplus real estate, thereby meeting the government’s directives to cut costs by 7% or increase revenues by 7% (or any combination thereof) to hit their departmental budget targets.
Wouldn’t that have been much better than the pain inflicted on the bottom-two economic quintile people in Britain (and which cost Theresa May a parliamentary majority) all of which has conspired to cheapen the ‘British brand’ around the world?
Read here, in the New York Times just how ‘fairly’ or ‘unfairly’ (depending on your worldview) the United Kingdom’s austerity plan has been portrayed around the world.
A country’s fortunes (fairly or unfairly) can rise or fall based on the perceptions of large numbers of people. Let’s hope that future UK budget cuts will not only be fair, but be seen to be fair by large numbers of Britons and by people around the world.