The general election campaign that we’ve endured for the last few weeks has at times seemed rather ‘odd’, compared to many that have gone before, but the one thing that hasn’t been any different is that every politician from every party has been making lots of promises.
Promises to make things better, or to ‘fix’ things. Forget why those things might need ‘fixing’, vote for us and we’ll do it.
Many of the political ‘experts’ wheeled-out by the media have been predicting a result that will represent a ‘generational change’ in the political landscape: they’re assuming that the Conservatives will suffer near-oblivion and Labour will gain a huge majority, possibly greater than they achieved in 1997. Well, maybe, but perhaps they should remember that the Labour governments under Blair/Brown were actually only in office between 1997 and 2010; do thirteen years really represent a ‘generation’ – and did those years produce some lasting changes?
But that’s all about politics, we’re usually here to talk about economics and finance; and that’s what all of the politicians’ promises are based upon. As far as most of the politically-‘neutral’ economic analysts are concerned whichever party wins and whoever happens to be the next Chancellor of the Exchequer, they will very soon come-up against economic and financial realities that will make election promises look rather ‘difficult’ to deliver. Because ‘fixing’ anything (let alone making it ‘better’ than it is already supposed to be) costs money. Lots and lots of money. Whether they’re talking about the NHS, social care, defence spending, crumbling schools or even just crumbling roads, any realistic ‘fix’ of any one of those things will be expensive. Tackling all of them is a pipe-dream.
The basic problem is that no political party will admit that their spending-promises would inevitably require some form of increase in taxation. You don’t get elected by telling hard truths. Instead, they all choose an old get-out-of-jail-free card: they promise economic ‘growth’ and that somehow that will generate enough tax revenues to fund their spending without anyone actually noticing that their individual taxes have increased.
There are (at least-) two factors which make that less than realistic. The first is that real economic growth is extremely difficult to achieve: it requires improved innovation and productivity – and while the UK is quite good at the former, it is notoriously bad at the latter. Those requirements are common to every economy, but we are in a worse position than most because of some spectacularly bad sell-inflicted wounds over the last decade.
The second factor is that even if you somehow manage to generate a decent growth-spurt over a few years, you have to be able to extract taxes from that into the Treasury in order to spend them. And the UK, in common with most mature economies is very poor at doing that. Over decades (regardless of which party has been in office) the wealthiest corporations and individuals have managed to effectively remove themselves from paying much tax anywhere. Most countries seem to still be working on taxing things as they used to be in the analogue 20th Century; almost nobody has worked out a way of coping with the digital world of the 21st. And even when economists do come up with a method of doing it, no one country can really implement that method on its own – it requires international co-operation. The result is that even if an economy shows some healthy growth in GDP (or any other measure), much of the tax revenue expected from that ends-up in some remote off-shore tax haven.
None of this is to suggest that it doesn’t matter who wins the election – some things may change quite dramatically; but those changes are most probably going to be ‘social’ in nature. On the economic side simply expect that almost inevitably there will have to be some tax increases, somewhere, to start to pay for any of those politicians’ promises.
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