Thursday, March 24, 2011

Looks like Osborne is determined to turn the UK into Ireland

In 2006, George Osborne penned a piece for the Times called Look and learn from across the Irish Sea, which he began with the memorable opening phrase,

A GENERATION ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable.

It's still laughable, but he doesn't seem to get it, and today's budget was a continuation of his stated aim to emulate Ireland - he cut corporation tax rates just two months after he hiked VAT on consumers.

He fondly believes that cutting corporation tax stimulates the economy - but as the Irish experience shows, the only thing that stimulates an economy is consumption - preferably by the consumer or but in emergencies, consumption by the state works too. But what has he done? Taken a hammer to the consumer with his threats to people's jobs, VAT rises and petrol rises (albeit backing down by a tremendous penny on petrol), and cut consumption by the state at the same time.

Anyone who runs a business will tell you that in order to survive, you have to sell stuff - which means other people need to buy stuff from you. It's literally that simple and that difficult. If people stop buying, no amount of corporate tax cutting helps - because if you don't make the sales, you don't make the profits, and corporation tax is merely a theoretical notion.

I've never heard of a business saying they will close down if their corporation tax isn't cut by 5%, but I've heard plenty say they have to close because they can't make sales. Forget all the tortured arguments about encouraging people to start new businesses with the corporation tax cut - success in business is more about how the hell you keep a business going, how you sell stuff. Starting the business is the easy bit.

Osborne's decision to heap taxation on individuals and simultaneously lighten them on businesses, actually hurts the economy because it clobbers those who underpin any economy, anywhere - consumers.

We got a glimpse of what is going on in the latest figures released by Sainsburys. Like for like sales increased by just 1% in the 10 weeks to 19th March, down from 3.6% in the previous three months. It will just take a small further tightening of household budgets to tip them into a fall. Sainsburys (and Tescos) have blamed the VAT rise. Will the cut in corporate tax help them? It depends on whether the impact of VAT, high inflation, high fuel prices and high joblessness reduces sales by more than the 5% corporation tax has been cut by. If it does, profits after tax will be down despite the corp tax cut, and their only option is to cut expenses - jobs - which frightens the consumer even more.

Ireland has proved that if you get the the balance between households and corporations wrong, if you expect households to shoulder all the burden and corporations and shareholders none, you end up in a death spiral. Shareholders don't spend enough to keep an economy going, and that's before you factor in the fact that most shareholders are either off-shore or overseas investors anyway. Trickle down economics doesn't work. But that's what has been served up by the Tories today.