Episode One proved to be far more prescient than even we thought. In the opening paragraphs, we mentioned the psychological whiplash an Anglo-American dual national might feel, as on the one-hand she gets stimulus checks from Presidents Trump and Biden, while on the other the British government revs the engines for another round of spending cuts and tax rises.
Across the pond, the Biden administration has bet the farm on fiscal stimulus, desperate to avoid repeating the weak, slow, low-wage recovery from the Great Recession. A $1.9 trillion stimulus bill is likely to be followed by a vast infrastructure spending bill, initially floated at around $1 trillion, although it seems likely that the Democrats will have to lower their ambitions to accommodate Senate Republicans and Joe Manchin.
Like George Lucas, you can definitely argue that the Biden people have gone a little bit too far in a few places, and Alan Cole makes a fairly convincing case for this over at Full Stack Economics. It is also true that eventually they’ll likely wind up hiking taxes themselves, although given their wafer-thin majorities in theHouse and Senate, any increases will almost certainly be small and in any event would be in the wake of the 2017 Trump tax cuts.
Meanwhile in Britain, the government is rapidly moving ahead with scrapping fiscal stimulus brought in during the pandemic, such as the £20 weekly uplift in Universal Credit, and is piling on the tax hikes. Corporation tax is going up by 6 percentage points (from 19% to 25%), national insurance is going up 2.5 percentage points, and tax on dividend income is up 1.25 percentage points. Various other effective tax raises have been announced, such as a freeze to the personal allowance threshold.
All told, our rough estimate is that it adds up to tax hikes of around £30-40bn per annum by 2024/2025 (please get in touch if you think we’re way off). Most of this will likely wind up being spent on increased funding for the NHS. Theoretically, after 2024, much of the extra cash is supposed to be redirected into the social care system, but no one believes that anything in British politics will ever get funded by the expense of the NHS, and nor should they.
As striking as the tax hikes themselves, though, is the media reaction. Domestically, there have been two main reactions:
1) The tax hikes are distributionally unfair, with much anger that low-paid younger workers are being charged higher tax rates in order to pay for the health and social care of the propertied elderly, while the inheritances of those in their 50s and 60s are protected.
2) Perhaps there are some distributional problems, but the government is to be commended for bravely “grasping the nettle”, and the Labour Opposition are revealed as shallow opportunists for having no alternative plan (amusingly, some people have even tried to argue both at once!)
Almost no one, apparently, is prepared to point out the most obvious issue . The UK has vastly bigger problems than an overstretched healthcare service and low-quality social care. It has a growth problem. Policymakers seem mentally stuck in the 1992-2007 era, where the British economy overperformed relative to its peers. The three years after the Brexit referendum but before the pandemic saw pathetic growth, while the US economy boomed. Yet even before Brexit, the recovery from the Great Recession was defined by low productivity, stagnant wages, and falling living standards, though employment rates stayed consistently high.
To raise taxes now, with 10-year yields at 0.75% and 30-year yields at 1.08%, you have to believe at least some number of the following propositions:
1) Tax rates have virtually no effect on the growth rate.
2) The economic recovery from the pandemic is guaranteed to be extremely fast and strong.
3) There will be little to no long-term scarring effects.
4) The strength of the recovery will be massively harmed if deficits stay high for the next few years.
5) Interest rates are somewhat likely to soar over the next few years, even if growth remains weak.
Propositions 1 & 4 are of course obviously false, although people sometimes try to justify some version of 4 with gibberish about how QE massively raises the sensitivity of the debt stock to short-term rates (this is true, but also irrelevant absent vast mistakes in policymaking). And while while numbers 2 & 3 at least somewhat plausible, there’s no way anyone can be confident enough in them to bet the health of the British economy.
Number five is perhaps the most interesting of the bunch, since it points to one of many fundamental weaknesses in British elite political discourse: the lack of any understanding of long-term trends in interest rates, and the powerful demographic and social forces driving them downwards (credit, once again, to Full Stack Economics for their great work). Implicitly, however, we think British policymakers view future interest rates are essentially random, equally as likely to return to 1970s levels as to stay depressed.
Naturally, this is very silly, but it fits with a growing lack of economic literacy amongst policymakers. Somewhere down the line, the (correct) Thatcherite understanding that the state is bad at many things and should do less morphed into a tacit view that the state is powerless to affect growth, productivity, fertility, and other good things we care about. While the Treasury clearly understands elements of the problem and occasionally comes up with good ideas in the right direction, such as the super-deduction for business investment, overall its influence is far more weighted towards achieving short-term cost savings than long-term growth. No doubt well over a decade of promotion being contingent on pro-austerity views, either held implicitly or expressed explicitly, has not helped. As others have pointed out before, Britain has no department for growth with anything like the Treasury’s institutional clout.
If growth stays low in the post-covid years and the UK returns to the post-Brexit trendline, the results are obvious: growing immiseration, low tax receipts bringing further rate hikes, and a growing contingent of Deanos angry that they didn’t get their bonus this year. Post-growth politics will be an eternal winter of discontent and ever-more frenzied attempts at redistribution.
To mobilize that discontent, however, will take a political entrepreneur of rare quality, high-profile and talented enough to operate outside the two-party system. Such people can achieve enormous change, as Farage showed. Whether one arises, though, is entirely random and unpredictable. Many gaps in the political marketplace exist, but only occasionally are they filled.