Osborne’s budget should show some Brazilian flair

June 22, 2010

England today feels disjointed, scrappy, rudderless, and destined for failure. And that’s not just a review of Fabio Capello’s England squad and their chances against Slovenia tomorrow, I mean the wider British economy.

Let’s just recap how we got to the situation where a new government has had to call an ‘emergency’ budget within fifty days of taking office. The wealthy nations of the world enjoyed a house-price bubble, which was boosted by mortgage lending from a global financial market that endlessly found ways to speculate on the incessant growth in property value. Our leaders sat back and basked in the reflected glow of their light touch.

Now the crisis beckons and it’s up to those leaders to do something — fast. In his dystopian classic ‘1984’ George Orwell created a vision of a society living in constant fear of a distant and undefined enemy, allowing the government the freedom to behave as they please.

That vision sounds familiar to the headline-writers, now Greece is considered an economic basket case with pundits predicting which of the Mediterranean nations will join them soon on the economic naughty step. But our government needs to usher in a new age of austerity so it helps to create a sense of urgency, to point to failing nations and suggest that we might be next in line.

When times were good we had the endlessly increasing property values, cheap loans, consumer spending, and healthy tax revenues. Now consumer spending has collapsed and the newly formed Office for Budget Responsibility (OBR) is erasing all trace of previous growth targets published by the Labour government. Former Chancellor Alistair Darling predicted growth of 3-3.5% in 2011, but the OBR warns it will only be 2.6% and a full one per cent lower than Labour predictions for the subsequent three years.

The OBR is basically saying that even though the British economy collapsed and went into decline for six consecutive quarters, there is very little scope for rapid growth without inflation kicking in and bring new issues to the table.

What is going to happen in the Osborne budget? Almost certainly there will just be some tinkering around the edges of the existing revenue collection system, with government ministers arguing that their hand was forced and opposition leaders squealing in indignity.

Given we are still hiking the foothills of recovery from the worst financial crisis ever documented in the modern age, perhaps it would be appropriate to explore some more radical measures?

The organisational behaviour expert and philosopher Charles Handy wrote extensively in the 1980s about the iniquity of taxing income rather than consumption. The rich spend more, so tax what they spend, and that naturally favours the poor who spend less, and removes the need for a vastly complex system of income tax.

And why not tax the land itself? It’s an idea that has recently been given a boost by the economist Philippe Legrain in his book Aftershock. In a review of the book for the International Institute for Strategic Studies, former editor of The Economist Bill Emmott said:

“…governments desperate to reduce their budget deficits and get their debts under control should not raise taxes on income and employment, as many are wont to do, but rather on land values. This is an old idea, of which even Winston Churchill was fond, but one that has been too easily pushed aside by property-owning lobbies and, in the post-1945 era, by farmers. Unlike taxes on income and employment, land taxes do not deter hard work, and given that land is immobile, it cannot emigrate to Switzerland. The trick is to set a rate low enough to avoid mass land sales but high enough to generate sufficient revenue. Given that one of the main causes of this crisis has been excessive investment in property, in scores of countries, this ought surely to be an appealing idea.”

Instead, the BBC predicts that today the chancellor will announce a number of measures, including a levy on bank profits, an increase in capital gains tax and rises in cigarette and alcohol duties while a change in aviation tax is also expected. As punk legend Pete Shelley once sang: “I’m living in this movie, but it doesn’t move me…”

After a shaky start, Brazil is now favoured to win the world cup in South Africa. It’s appropriate, as the next world cup will be staged there in 2014, followed by the Olympics in 2016. Brazil enjoyed economic growth of 9 per cent in the first quarter of this year, compared to the same period in 2009. Inflation is on target and a general election is scheduled for October – due to their electronic voting system, all results will be counted within a couple of hours of the poll closing.

On or off the pitch, where is the strategy that changes our game here in the UK? We need some Brazilian flair, not a decade of austerity.

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