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Economics

5 lessons to learn from Britain’s Trillion Pound Horror Story

Channel 4 recently aired an excellent hour-long program called Britain’s Trillion-Pound Horror Story, discussing the state of the British economy. It revealed the true scale of the debt, explained how we got into this situation and discussed ways to improve our economy. There was a lot to take away from it all, but I have narrowed it down to five simple points.

Inflation is a stealth tax

There was outrage from both the political left and right when the Government decided to raise VAT from 17.5% to 20% for non-essential goods. It was argued that this would harm the poorest the most by forcing them to pay higher prices for their goods when they can least afford to do so. Yet this is precisely what happens when the government prints more money, except the cost of basic goods such as bread also rises. We can already see this happening and yet the Federal Reserve in America plans to inject another $600bn into the economy, meanwhile the Bank of England is going consistently beyond its target of 3% inflation.

As well as driving up prices, inflation damages savings. With inflation at over 4% and interest rates being much lower, savings are decreasing in value. It seems immoral for the government to be stealing the savings of those who spent less throughout their lives so that they could have more to spend in later years. Interest rates are being set artificially low because the government wants to encourage consumption rather than savings. What they fail to consider is that we need to increase our productive capacity and for this we need investment from savings, so our current policy is economically unsound as well as morally dubious.

The NHS needs reform

In the competitive private sector there is an incentive to be efficient and cut waste. If a company fails to do this, a competitor may provide the same service at a lower price. However the opposite is true for the NHS. Whenever it is seen to be failing the solution is usually to throw more money at it. Over the last decade there has been a dramatic increase in NHS spending without a proportional increase in the quality of service. Being a public monopoly, there is simply no incentive to provide a good service at a low cost.

It is understandable that many worry about the poorest in society and whether they have access to healthcare. The private provision of healthcare with the insurance being subsidised by the state for the poorest would be preferable to the status quo where everybody is forced to either accept what they’re given, or pay twice. Our healthcare budget is enormous and it should be one of the first areas to reform, yet our Conservative government has decided to ring-fence NHS spending. Other countries around the world demonstrate that public provision of healthcare is not necessary for universal coverage.

Government spending doesn’t stimulate the economy

For decades the Keynesian view that government spending can stimulate the economy has prevailed. Many feel that it pays during a recession for one man to dig a ditch and for another to fill it back in, although I’m sure this seems counter intuitive to everybody, deep down. The problem is that the focus is only on what is seen, the jobs and growth created by the new government programs. However the money to fund this comes from taxes; had those taxes remained in the hands of the people they would have spent that money in the private sector and would still have stimulated the economy. It is more efficient for the public to decide where they actually want their money spent than it is for the government to spend it on their behalf on projects the public may not even need. When taxes rise to fund an engorgement of the public sector, jobs are being lost, but that cannot be seen and so it is often ignored.

If a large public sector did stimulate the economy then the North East of England would be doing exceptionally well, as its public sector is now a massive 73% of the economy. Yet the region suffers from unemployment and economic stagnation, as the private sector desperately attempts to pick up the slack. Reducing the UK’s tax burden would help the private sector grow, which would allow regions such as the North East to flourish once again.

Lower taxes can increase revenue

Once the public sector becomes so large that huge taxes are required to fund it, the private sector suffers. Business taxes reduce profits for companies, which prevents them from reinvesting their earnings and growing. Meanwhile, high income tax, particularly on the poorest in society, gives less incentive to work. When the government punishes hard work and success you will quickly find that people simply commit less of their time to working and tax revenues drop.

In contrast, a system that allows individuals and businesses to keep a large portion of their earnings will encourage high levels of production. Once taxes are low enough it will also encourage entrepreneurs from overseas to invest in the economy, proving growth and jobs. Taking a small portion of a huge pie can be better than taking a huge portion of a tiny crumb, which is exactly what they discovered in Hong Kong and Eastern Europe when they introduced a low flat tax.

Our current government is not smashing the state

Many people are worried that the government is cutting too much too fast; this is the official line the Labour party is currently giving. The Conservatives themselves seem all too eager to point out that desperate times call for desperate measures. Yet the size of the state is set to increase over the next five years, from £697bn to £757, so all that is being cut is the rate of the increase. Of course part of the reason for this is that the interest on our debt is steadily increasing, but that merely proves that tackling the debt is essential.

Not only is government spending increasing, but so is the debt. The government is merely reducing the deficit, the amount of money that we are losing each year. They’re not actually concerning themselves with the national debt at all. That task will be left to my generation, who also have to pay for the pensions of the much larger generation of baby boomers.