Those whom the Gods wish to destroy, they first make mad - and New Labour's current economics certainly suggests a degree of madness. Britain is clearly heading into serious recession, with unemployment rising, house prices collapsing and a re-run of the early '90s economic disaster - which destroyed the Tories - on the cards. The government and the Bank of England are doing precisely the opposite of what is required, acting in accordance with utterly misguided monetarist dogmas in seeking to restrain public expenditure and holding up interest rates, strategies which will simply guarantee a plunge into recession.
Of course inflation has risen as the result of external factors - even the Bank of England admits that this is a temporary phenomenon which will rapidly diminish in the coming months. Oil prices have already fallen back from their recent peak and increasing food production should see food prices moderating too. But even if this were not the case, these factors constitute a step change in prices, not a driver of ongoing inflation.
Increasing fuel and food prices do however have a serious deflationary impact on the wider economy as consumers have to spend a higher proportion of their incomes on these essentials and have less to spend on other things, thus sucking demand out of other areas of consumption and reinforcing recessionary trends. What is really needed now are radical steps to put money back into the pockets of ordinary people and help them pay their bills.
Clamping down on the pay of low paid public sector workers is precisely the opposite of what should be done, both in terms of social justice and economic management, as is trying to cut jobs from the civil and public services. Cutting jobs will push up unemployment forcing thousands more families to tighten their belts, adding another twist to the deflationary spiral.
Then we come to interest rates, which in any sensible world would now be tumbling. Millions of mortgagors would then have lower mortgage costs and more to spend on other things, giving a vital kick to consumer demand. Borrowing costs in general would also be lower, including the costs to consumers of servicing the mountain of credit card debt.
One major difference between current circumstances and 1990-92 is that as the result of avoiding entrapment in the Euro, Britain can at least adjust its exchange rate to help the economy. Indeed, during the first part of 2008, Sterling did undergo a substantial depreciation which will have the effect of deflecting consumer demand away from imports and towards domestic produce.
Had Britain now been a member of the Eurozone, economic disaster would have been guaranteed, with interest rates controlled by the unaccountable European Central Bank and no possibility of achieving an appropriate exchange rate - especially in relation to the Eurozone - because Britain would simply not have its own currency. Gordon Brown's one major sensible decision was to keep Britain out of the Euro. That being said, Britain's financial decision makers should now use the country's vital freedoms in economic policy to stave off recession by reducing interest rates and accepting a possible further depreciation of Sterling to give a boost to British manufacturing among other things.
It is normal for governments to borrow in times of recession and repay that borrowing in periods of economic expansion. Britain's gross borrowing levels are not high by historic or international standards. Gordon Brown's 'golden rule' about limiting borrowing to 40 per cent of GDP was always nonsense. However if the Chancellor wishes to raise revenues to help sustain high levels of public spending this can be done without deflating the economy if he is prepared to tax the rich.
In simple economic terms, the rich are said to have a low propensity to consume, which means they save most of their money rather than spending it. At the other extreme, the poorest have to spend all their money on day to day living and have a so-called high propensity to consume. Redistributing income from the richest to the poorest therefore helps to boost the economy, and raising taxes on the rich would have a negligible impact on aggregate demand in the economy.
Under New Labour, and even more so under the Tories, there has been a relative shift of income from the poorest - and indeed from the middle class - to the richest, so there is an overwhelming argument for making taxation more progressive.
Alistair Darling would do well to take a leaf out of the book of Dennis Healey, who as Chancellor said he wished to 'squeeze the rich until the pips squeaked'. In 1979 the top marginal rate of income tax was 83p in the Pound with a 15 per cent surcharge on unearned income. Thus for the very rich who lived entirely on unearned income, their top marginal rate was 98 per cent.
Thatcher's first act after her 1979 victory was to introduce a budget with the top rate of tax cut to 60 per cent, paid for by an increase in VAT from 8 per cent to 15 per cent and thus in effect taking money out of the pockets of ordinary people. Subsequently, Nigel Lawson cut the top marginal rate from 60 per cent to 40 per cent so that those on just above average incomes now pay the same top marginal rate as the mega rich.
Simply raising the top marginal income tax rate for those on £100,000 plus, from 40 per cent to 60 per cent for example, would be both socially just and provide scope for additional public expenditure to counter the looming recession. This column has previously suggested a much more radical transformation of the taxation and benefits systems, but a 60 per cent rate on income over £100,000 would be a useful start.
In conclusion, it has to be said that New Labour seems to have no real understanding of economics and how it works and has been driven simply by neo-liberal dogma and slogans. Gordon Brown's much repeated phrases 'no more boom and bust' and 'long term stability' always were nonsense as the debt mountain grew and grew and the credit crunch became inevitable. Those words now seem hollow and foolish, and the government's only relief must be that the Tories and Liberal Democrats essentially went along with his economic policies and seem still to be doing so.
The left has been ringing alarm bells for a long time, yet the government has refused to change direction. To save the economy and give Labour a chance of winning the next general election, that direction must change now.
Kelvin Hopkins MP
