Tax Analysts Blog

UK Conservative Policies in Trouble

Posted on Jan 25, 2013

This morning UK GDP figures for the 4th quarter of 2012 were released and the news is bad: the economy shrank by 0.3 percent. After the mini-burst of growth due to the Olympics, the UK economy is back in the doldrums. Some are calling it a triple dip recession. The chart below shows why the UK voting public has every right to question the economic policies of Prime Minister David Cameron. Even the normally circumspect IMF is telling the PM to give it up.

In addition to slashing government spending Cameron has slashed the corporate tax rate and the greatly relaxed rules on multinational corporations. But with corporate tax receipts falling in the face of rising profits and the revelation that several profitable high-profile businesses are paying little or no UK tax, the austerity-squeezed public is in an outrage. Parliament is in a fury. And Cameron himself has promised to crack down not just on illegal evasion but also on legal avoidance that is deemed to be too aggressive.

Back in the USA Republicans want to do what Cameron has done: slash government spending in the face of high unemployment and grant even more generous tax breaks to multinationals who are already paying low tax. The UK experience should be a cautionary tale.

Read Comments (6)

Rusty SteeleJan 25, 2013

Fascinating. This should be front page news. The implications for the US fiscal
posture are significant.

This post raises a secondary question: Why would any political party
(especially one which outwardly claims to view economic growth as a positive
force) insist on pushing America closer toward austerity? Such banter borders
on the irresponsible. The evidence is there for all to behold.

Is GOP loathing of all things Keynesian so overpowering that it trumps basic
common sense? Or is this merely a case of politics becoming the policy (aka
"the opposition orthodoxy").

GOP worst-case-scenario is that economy improves and Obama receives some
modicum of credit. Can't have that. Thus all public spending must be vehemently
castigated. Yet, once GOP attains power such deficit-spending is suddenly
viewed as stimulative and desireable (see, the entire Bush era).

<< Lo, how the pendulum doth swing.>>

Honestly, the more the GOP open their mouth on these issues, the more Krugman
starts to make sense.

I'm starting to believe that GOP seeks austerity-at-any-cost because they
actually want US growth to nose dive, just so long as it can be blamed on
Dems. The last time I was on the Hill I heard GOP wonks speak of their need
for a 'fiscal Benghazi.' Lack thereof was cited as reason for Romney defeat.
Really? That's how they see the world?

Label me a crazy Keynesian for actually wanting there to be a recovery,
irrespective of who gets the credit.

Ceteris ParibusJan 29, 2013

Or could it be that the UK's heavy exposure to the financial sector, declining
North Sea oilfield production, and proximity to the Euro crisis means that no
macroeconomic policies could hope to do more than limit the UK's short-term
economic decline?

I've noticed a lot of shallow, partisan analysis on both sides of the
macroeconomic debate that uses an argument of the form: "Country X implemented
Policy A, but Country Y chose Policy B instead, and by a particular measure of
macroeconomic health, County X outperformed, which means that Policy A is
superior to Policy B." This shallow analysis, which makes no attempt to
distinguish correlation from causation, adds little to macroeconomic policy
discussion and does little to improve the battered post-crisis reputation of
economics.

Hurricane ScooterJan 29, 2013

It is all things Kenyan that they loathe.

Paul NYCJan 29, 2013

IF the UK is a cautionary tale for the USA, then Japan is a horror story. Now
past 200% of GDP in debt with absurdly high liquidity and for over 30 YEARS.
The only thing Japan has in its favor is "full employment", but given the bloat
of Japan's government sector, there is no wealth creation and little innovation.

Japan has done everything the Keynesians have told them and they have remained
in a rut.

So, how now, Paul Krugman???

Gary BJan 29, 2013

Govt Spending clearly supportive of growth, but at what point do the absolute
levels of debt come in to play? Keynesian policies make sense and have a place,
but unlike the text books there has been no surplus built up in boom times - so
it is just debt, deficit forever, or until the lenders want a higher rate.

von GneisenauJan 31, 2013

Must be hard bloviating in a less relevant medium than Krugman's.

What the UK should do first is, is break the chains that bind it to the
subcontinent - let us hope the citizens (those who are still left and haven't
emigrated) are given the opportunity to make the right choice.

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