VAT a Balls-up!

Hot on the heels of the IMF’s “endorsement” of George Osborne’s plans for the economy comes the disastrous May figures for retail sales, and Ed Balls making a speech suggesting that VAT be cut back to 17.5% to jump start sales on the high street.

Clearly, our economic waters are confusing and choppy at the moment.
Buried deep down in the original text of the IMF document (point # 9, in fact) we find:

Risks and uncertainty around this central scenario are significant. Large risks to growth and inflation arise from uncertainties surrounding euro-area sovereign turmoil, the housing market, the size of the output gap, and commodity prices. Indeed, unexpected spikes in commodity prices were a significant factor behind revisions to our 2011 inflation and growth forecasts since the 2010 Article IV consultation. Another risk is uncertainty surrounding the size of fiscal multipliers and the degree to which private demand and net exports will be vibrant enough to pick up the slack from fiscal consolidation. Uncertainties arising from key risks are further compounded by the unusually large disconnect between recent weak GDP outturns and other indicators that are stronger (e.g., rising employment, higher-than-forecast tax revenue, and stronger private sector surveys), making it all the more difficult to ascertain the economy’s near-term direction

Translation? We haven't got a fucking scooby.

My interest had been piqued by this, so I rang up the IMF Press Office. I know, I will be for it when the phone bill comes in, living off bread and scrape, sleeping in the dog kennel and no sex for a month (no change there, then) but it was worth every penny.

I wish I had recorded it.

IMF WOMAN: Media relations, how many I help you?
ME: Hi, I am a freelance writer in the UK and I was thinking of writing something about John Lipsky, following his pronouncement on the UK economy. Am I right in thinking he's now the acting managing director?
IMF WOMAN: That's right
ME: And is he getting the same salary as Mr Strauss-Kahn, I mean, given that he's going the same job?
IMF WOMAN: I don't know. Would it be possible for you to put your question in an email to ...
ME: Well, it's a simple enough question, someone must know the answer. Is there a section on the IMF web site where you publish peoples' salary scales?
IMF WOMAN: No.
ME: Is that because it's a secret?
IMF WOMAN: I don't know. If you could just send an email to...
ME: So you are saying that you either don't know or you won't tell me what the managing director of the IMF earns?
IMF WOMAN: Yes
ME: Well, I think that tells me all I need to know about your grasp of economics. Goodbye.

My reason for asking is that I suspect, from Mr Lipsky's bio on the IMF web site, that he is not short of a bob or two. Given his current directorships and his previous posts with various fund managers (hang on, weren't they the ones that caused all this...?) I reckon he's probably got the odd "portrait of Madison" in his safe. And good luck to him.

I also suspect, although, unlike Mervyn King, he hasn't been stupid enough to say that he's probably also of the opinion that unemployment in the North of England is a price worth paying etc etc chiz chiz, whatever the quotation was. If it looks like a duck, walks like a duck, and quacks like a duck, it's ... probably ... a duck.

I managed to find out, by a bit more research, what Mr Strauss-Kahn was on in 2007 when appointed. A tax free salary of $420,930 pa [source: Bloomberg Economic Weekly] plus benefits.

So, let us assume that Mr Lipsky is on the same, although if he's still working on a 2007 salary scale, I will masticate my headgear.

$420,903 pa is $8094.81 per week, which, at today's exchange rate, is £4913.55 per week. Tax free.

The current rate of Employment Support Allowance in the UK at the lowest level is £65.45 per week.

Obviously Mr Lipsky is very well-qualified to rubber-stamp Osborne’s assault on the poor and the disadvantaged.

True, there has been one glimmer of hope for the benighted fools in Westminster in the news that unemployment is apparently down. The private sector created 88,000 jobs in three months, apparently. Of course, many of these “jobs” will be part time and poorly paid, with little or nothing in the way of security or workers’ rights. And I still adhere to my previous statement that we haven’t seen the worst of it yet, simply because the effect of the Tory cuts dumping people onto the unemployment register hasn’t percolated through to the bottom line yet.

Into all this maelstrom of uncertainty blunders Ed Balls, attacking the government and insisting that the VAT increase be reversed as a matter of urgency. On the face of it, it should be good news that at least the Labour Party has rediscovered its balls (literally and metaphorically) and is making some sort of effort to attack the Tories.

However, as Ann Pettifor points out on the blog “Left Foot Forward”, by accepting that the underlying premise for the debate is simply “cuts” to “pay down the deficit”, and the only point at issue is how quickly and how deeply these should take place, Balls has in fact surrendered much of the battlefield to Cameron from the start. The whole article is worth reading, but these are the salient points:

Balls began his speech by mentioning Labour’s “emphasis on jobs and growth”, but the speech immediately morphed into Labour’s concession to the coalition, that what is needed is “a steady and balanced approach to halve the deficit in four years”. The implication being that cuts must be matched by ‘jobs and growth’. But the highlight of the speech – the soundbite that his spin doctors no doubt intended the media to emphasise – is a call for a cut in VAT “to boost consumer confidence and jump-start the economy”; Cameron flashed back his retort: “slashing taxes”, he argued, would only make the UK’s fiscal deficit worse. And so Balls is trapped: the debate now centres on whether the deficit can be financed by increasing or cutting taxes, in particular VAT. For most people, Cameron has the upper hand.

‘Of course the deficit can only be financed by increased taxes’ is the consensus. Because we have ‘spent beyond our means’, we have to raise taxes, like VAT. “Slashing” VAT – when it is higher VAT returns that are paying down the deficit – is unacceptable to the coalition, to the Treasury, to orthodox economists and to the bulk of the British public. But that’s only because most have been drilled in the propaganda: “the deficit is like a credit card”. We need to pay it down. To do so, we have to mobilise/hoard ‘savings’, i.e. higher taxes, to pay down the ‘credit card’ – but the government’s deficit is not like a credit card. And nor do we need ‘savings’ to pay it down.

The only surefire way of paying down the deficit is not by government cutting the deficit (which I and others have argued it cannot do), but by employment. Put 2.43 million people back to work, and – hey presto! – the deficit will vanish. Get 2.43 million people, including thousands of skilled and unskilled workers, clever and talented student graduates, to address Britain’s very real insecurities in energy, food and health and – hey presto – the deficit will be financed.

How? By the tax revenues that will pour into the Treasury’s coffers, either directly or indirectly – and by the savings that will be made on welfare benefits.

However, keep 2.43 million people unemployed, keep them feeling insecure, with their purses firmly shut, and you can guarantee an ever-rising government deficit (April’s deficit numbers were the highest on record for that month). And 2.43 million unemployed is sure to make British ‘confidence’ fall and the recession deepen.


I couldn’t have put it better myself.