Dr Liam Fox’s economic prescription: kill or cure?

Economic jihad. That’s how Vince Cable described Dr Liam Fox’s speech to the IEA this morning. Dr Fox’s speech is worth reading, though, precisely for the parts of it that have not been covered in the wider media. For it sets out a clear – albeit deeply conservative – approach to how to reform our economy for the long-term. But while the proposed destination is well-articulated, the route is far from certain.

Let’s start with the positive. I agree, broadly, with Fox’s analysis of the causes of our current economic state. While I wouldn’t exactly phrase it thus, there is something to be said for the following passage:

History will judge Gordon Brown and his disciples harshly.  They spent with abandon, rolling out the Socialist vision of a big state.  But much worse; rather than diminishing the reliance that individuals have on the state, they purposely pushed the drug of welfare addiction to more and more people, ensnaring even the affluent middle classes.

Today, we see the full destructive consequences of that behaviour with ordinary families paying too much tax so that it can be given back to them in benefits and credits, to no one’s advantage other than the army of bureaucrats needed to administer it.  It is debilitating for society, demeaning for individuals and expensive for the taxpayer.

The expansion of welfare addiction is one of the most corrosive effects of socialism and it must not only be neutralised, but reversed.

The public understand what we are saying – that we cannot continue to live beyond our means and spend money that we do not have.

It’s difficult to disagree that collecting taxes only to give it back through (among others) tax credits, winter fuel allowance and child benefit – with all the bureaucracy that involves – is not at all sensible. And indeed abolishing these systems should be a Liberal Democrat priority; a theme that would be a natural continuation of our moves to reduce the tax burden on those on low and middle incomes.

Where I depart from Fox is in his proposed solutions, both to the short-term lack of economic growth and (even more) the long-term structural reforms he wishes to see.

His immediate solutions are essentially to freeze government spending at its current level for three or five years, the latter of which would reduce public spending by a cumulative total of £345bn. Here’s the justification:

As a Conservative, such a commitment doesn’t scare me. I believe that the country will be at its best when the Government is small and people are left to enjoy the fruits of their own labour.  I believe that in leaving money in people’s pockets, economic activity will follow. People will buy houses, invest for their future or just go shopping.  Whichever is the case, it is creating a society that is sustainable for the future in a way that our current – welfare dependent and debt ridden – economy is not.

One of the ways in which Fox proposes to use these savings is to abolish capital gains tax for a temporary period, before re-introducing it at what he calls a “more sensible” level:

This would create a tax window where businesses that are sitting on assets might be encouraged to sell, investment in capital becomes more attractive and where hundreds of thousands of second homes might come on to the market.

The problem, though, is that there is no evidence to suggest this would have any net positive impact on growth figures. Indeed the balance of evidence on the so-called ‘multiplier’ effects of government fiscal changes seems to suggest that the impact of reducing current spending and cutting taxes on GDP is roughly of the same magnitude: cutting a pound in public spending to cut taxes the same amount results in no net improvement in economic growth. Whereas increasing capital spending on infrastructure is generally seen to have a much higher multiplier.

So while there might be arguments in favour of his proposals, boosting the economy doesn’t stand up to an empirical analysis. Indeed there was one passage in particular that stood out as the very opposite as evidence-based policy making:

Let me take one of those examples. According to the latest census some 2.6 million people in Britain own a second home. Supposing for the sake of argument, one third, would like to get rid of their properties but are currently refusing to sell because they stand to lose 28% of their capital gain to the Treasury.  In a zero capital gains window, this could result in three quarters of a million properties coming onto the market with effects on Stamp Duty, retail sales, the employment of craftsmen and an effect on the building industry.

By my reckoning that section of the speech alone contains at least four assertions for which there does not appear to be any evidence.

Unfortunately, things only get worse from there, with Fox moving on to what he calls ‘repeat taxation’:

It should be a matter of principle, certainly for Conservatives and, I would argue, all others who wish to see the encouragement of thrift, self-reliance and the principle of equity; that we should gradually move towards the reduction – or even abolition – of the taxes where the state hits the same money on multiple occasions and discourages the very behaviour that would lead to a more responsible society.

He specifically cites stamp duty and capital gains tax as examples of such “immoral” taxes. But the problem with this is that almost every tax apart from income tax and business taxes could be called “repeat taxation”: VAT, fuel duty, air passenger duty, council tax, alcohol and tobacco duties. All of these taxes are generally paid with income that has already been taxed at source. And what’s more, surely on Fox’s own logic these taxes are more pernicious than (for example) CGT, which is not paid on the income that has already been taxed but on profits gained from investing that income.

This is dogmatic, ideological opposition to certain taxes, justified through faulty economic reasoning.

Many of Fox’s arguments are very interesting, but he should not dress up what are essentially conservative ideological arguments as ones based in rational economics. There would be many consequences of Dr Fox’s proposed policies, some of which might even be rather positive; increasing the rate of economic growth is unlikely to be one of them.

* Nick Thornsby is a day editor at Lib Dem Voice.

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9 Comments

  • Hear, hear.

  • I, for one, thoroughly welcome Liam Fox’s comments…

    … as demonstrating how extremely right wing the Conservatives would be if it weren’t for the Lib Dems, and how important it will be to vote Lib Dem in 2015, to stop either nasty right wing Tories or squandering, irresponsible Labour back into power on their own.

    The more the Tories disappear off to the right, the more opportunity there is to bring back the 10% or so of our 2010 voters (i.e. 2-3%) who have drifted off to them back into the fold.

    Thanks Liam. Every bit of help you can give us is much appreciated.

  • I find ‘Dr’ Fox’s comment repugnant and hope no Liberal would ever agree with them. Basically, his comments are simply a fancy way of saying, I am rich, Taxes do little for me, but take a lot from me, as such I dislike taxes and wish to pay less of them. While such comments may go down a treat in the rich mansions of the Tory’s elite, for those of us in the real world Taxes always have been the only effective and fair way to redistribute wealth across society. The irony of people like Fox is that they are so stupid they do not realise that their recessive and short-sighted views on how tax lacks any immediate gratification for themselves will end up costing them more money in the long run due to the massively detrimental effects their tax systems will have on society’ infrastructure, social mobility and the economy.

    Sadly though, men like Fox will always be too weak to pay Taxes just because it is the right thing to do morally, and too stupid to pay it because its benefits for them are immediate and noticeable.

  • Sorry, should be ” …because it benefits for them, as its benefits are not immediate and noticeable enough.”

  • The only reason we need tax credits is because employers are not willing to pay a living wage. Either we impose rent limits to cut taxes or up the minimum wage. If as Thatcherite politicians said unemployment is worth it to keep the economy growing, is it?, then those enjoying work have to pay for it or find another way.

  • Matthew Huntbach 12th Mar '13 - 12:11pm

    Underneath, the Conservatives are as they always were – the party of the idle rich, the party that believes money earnt from work is dirty and vulgar, while money earnt from owning things is noble. That is why they are more opposed to capital gains taxes and inheritance taxes and the like than they are to income taxes. Oh, they’ll dress it up, as Fox does here, with claims it’s all about enterprise and the like, but that’s nonsense. How much of capital gains REALLY comes from enterprise and how much just from passively sitting on an asset? In the end they fall back on the idea that we must support the idle rich and not tax them as much on the money they make as people who work for their income get taxed, because somehow they are an example to us all – we are supposed to be energised by seeing them there.

    The reality is that right now ordinary people don’t want to go out and spend money because of fear. They fear that if they have jobs now, they might not have them next year. So if they’ve got money they’d prefer to hang onto it, if they haven’t they daren’t risk borrowing in case they lose their job next year and can’t pay it back. Fox’s policy ideas with their threats of big cuts will just increase that fear and so push the economy further into slump. He is living in a very different world from most of us when he supposes it will do the opposite.

  • The freeze on government spending is appealing, however I wonder if Liam would be saying this if he was still Secretary of State for Defence…

    My first query on hearing this was to ask what hasn’t been happening since the 2010 election? as I like many others were under the impression that there has been strong downward pressure on government spending – the need for which was known about in 2007 when Alastair Darling observed that about 25% of government revenues came from the Financial sector and there was a blind assumption within government that this would continue…

    My second query (after hearing the full speech) was did this guy have any real idea about the tightrope the government is having to walk over spending, cutting and debt repayment. I found a Radio 4 piece last night interesting in that the effects of the current changes in benefits were being presented in a larger context namely they would cause £90m less to be put into the Newcastle economy; so Liam’s proposals would make this much worse.

    Like others, including some of the columnists in the Times, I fail to see how Liam’s proposals would actually deliver benefits and specifically to business. So perhaps his speech was a back-to-front way to encourage other conservatives to stay moderate and for his ministerial colleagues to accept reductions in their budgets…

  • Matthew Huntbach 14th Mar '13 - 3:00pm

    Roland

    My first query on hearing this was to ask what hasn’t been happening since the 2010 election? as I like many others were under the impression that there has been strong downward pressure on government spending

    Something which ought to be central to any political discussion is the fact that there are many factors pushing up government spending, so that what appears to be standstill in terms of levels of service actually involves a big growth in spending. It is not the only such factor, but it is the biggest one, that there has been a remarkable increase in lifespan in recent years. So many more elderly people having state pensions, requiring extra services that come from being elderly, and often requiring quite expensive medical care.

    When the political right wing go on about government spending still going up, and wanting to make us believe this is all due to an increase in the number of “bureaucrats” or comfier lifestyles for those on welfare benefits, they are either deliberately misleading us, or being incredibly thick.

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