Closing the Gap

Why should the British middle-class instantly reach for their wallets whenever they hear a British politician talk about closing the gap between the rich and the poor? Nick Clegg, the U.K.’s deputy Prime Minister, demonstrated exactly why in London today with his speech on creating a more socially mobile society. The rich quickly morph into the middle class, and so what he really means is closing the gap between the middle-class and the working-class. The real rich, as we all know, will just move overseas, if there is too much redistribution out of their pockets.

Of course, Clegg can’t say that, especially as he is in coalition with the Conservatives, but that is what he means.

I am all for greater social mobility – that is one of the driving reasons I, British-born, embraced the United States – but “wealth” redistribution is not the way to do it, or shouldn’t be the main driving force. Britain has been trying that since the Welfare State was established in the wake of the Second World War and as studies have shown it hasn’t been so successful. The increased redistribution primarily from the middle-class to the working-class and tremendous subsidies to geographically poorer areas of the UK under the Brown government failed dramatically to close the gaps dividing north from south or the one separating the middle-class from the working-class.

The review the Coalition government is undertaking now of the universal benefits system is a good thing – the well off surely should not be receiving subsidies in the form of child credits and heating allowances they don’t need. But how much is going to get taken from the middle-class at the same time as they are facing higher taxes before they decide either that they have had enough of the Coalition government or decide to trigger a 1970s-style brain drain?

Social mobility comes with providing fine schools, access to excellent higher education and the economic, commercial and regulatory circumstances that encourage entrepreneurialism, wealth creation and prosperity. And as history has shown, countries that declare war on their middle-class tend not to do so well when it comes to economic growth.

Arguably, Margaret Thatcher did more than Brown or Blair for social mobility and encouraging working-class aspirations. She did it by allowing council houses to be bought by their occupants at below market value – a policy fought tooth-and-nail by the left and center-left in British politics. She did it by welcoming success, encouraging entrepreneurism, keeping taxes low, reducing public expenditure and ceasing the British industrial habit of propping up lamb-ducks. She was also more heavy-handed with high-blown, snooty and traditional institutions than many Labour ministers were before her and have been since. And aspiring working-class voters loved her for it – that’s why she was re-elected.

Obviously, it was good to hear Clegg saying that the Coalition government aims to assist social mobility by improving people’s lives rather than by providing hand-outs, but sadly missing from the Clegg speech was anything about lower taxes — just more stuff about “fairer taxes”, in short more taxes on the middle class.

And this on the day when an excellent economist, Danny Blanchflower, a former member of the Bank of England’s monetary policy committee, urged the Coalition government to cut taxes or face another recession.

How Very Un-Tory

Apparently Britain’s new Conservative (?) Prime Minister thinks owning second homes is “not necessarily a splendid investment for the whole economy” and therefore it is okay to raise Capital Gains Tax on the sale of them from the current 18 percent to possibly as much as 50 percent. This is all part of his so-called “fairness agenda” – CGT tax increases will allow the coalition government to take more people at the bottom out of tax altogether – that is to say, he will assist those who didn’t vote for him and kick in the teeth the people he did.

Aside from the electoral risk down the road of doing that – and let us leave out for the sake of this posting the fact that the Tories did not campaign on increasing CGT on second homes or shares – it is hard to fathom the “fairness” here.

About 250,000 British families own a second home and that there are one million buy-to-let properties. Many who bought a second home are not wealthy but decided after the Brown government raided private pensions that the best way to help weather their retirements with a little bit of dignity was to invest in property. After all no one can live on the old age pensions the UK supplies – that is if they want to avoid penury. So Cameron is punishing the people who are trying to ensure that they are not an increasing charge on the State.

No one doubts that Britain’s financial state is parlous but the emphasis must be on spending cuts and not tax increases — that is both a matter of fairness and good economic sense: Britain’s only hope is to grow out of the crisis.

At 50 per cent there will be a devastating effect on people who have bought buy-to-let properties as part of their pension investments.

Also as David Salusbury, the chairman of the National Landlords Association, has pointed out the CGT increase will “act as a barrier to further investment in residential property just at a time when there is an urgent need for more housing”.

Britain Heading for a Double-Dip Recession

According to the splash in The Times today, both of Britain’s main parties — Labour and the Conservatives — are planning after the spring general election to raise sales tax from 17.5 percent to 20 percent, part of the desperate effort to start putting the country’s books in order.  And what will be the effect? Almost certainly to put the country into a double-dip recession.

Both parties are also talking about hiking income tax. January has seen a retail collapse — Britons just are not buying. And with a jump in VAT, retailers will have an even more torrid time. They are facing already in the spring a jump in business rates.

As I blogged back in September, both of the UK’s main parties seem oblivious to one of the key lessons of the Great Depression: federal and state tax hikes and currency devaluation prolonged the depression and pushed the US back into a second slump in 1937.

At Last — Cameron Gets Out Ahead

British Tory leader David Cameron is now calling clearly for a radical redistribution of power in the UK. His redefining of the relationship between the people and the political elite is a cogent and intelligent response to the House of Commons expenses scandal that has been roiling British politics for several weeks now. “I believe there is only one way out of this national crisis we face,” he said. “We need a massive, sweeping, radical redistribution of power. From the state to citizens; from the government to parliament; from Whitehall to communities; from Brussels to Britain; from judges to the people; from bureaucracy to democracy. Through decentralisation, transparency and accountability, we must take power away from the political elite and hand it to the man and woman in the street.”

Stirring stuff. But one of the big questions is why Cameron took so long to engage in this way. He has been more nimbled-footed than Gordon Brown in trying to get out ahead of the crisis and pressured his team to come clean about their expenses and to get them sorted. But why wasn’t he much tougher on offending Conservative  MPs and instead of just telling them, for example, to explain themselves to their constituency parties, withdrawing the Whip from them? After all, many of them are not his allies and he could have used this crisis as an opportunity to crush his right-wing opponents and mold the party more into the centrist image he would like. A lack of political courage or intellectual forethought?

On his more general point that a redifintion of power is needed, again there is a sense here of a lack of foresight. Back in 2006, I argued in a Cato podcast that Britain was crying out for a civil libertarian mesage — that ordinary Brits were getting sick and tired of the Big Brother state created by New Labour. At last a “freedom” message is coming from the Conservatives.