Around the world, led by President Obama and the EU, governments are busily making the recovery slower and more difficult. It is fashionable to urge and welcome recovery, and even more fashionable to sand bag it at the same time. In vogue are policies to cut bank lending and credit expansion, to tax enterprise, investment and saving, and to raise public spending.
The President has been especially keen to regulate and limit banks more, on a tide of anti bank sentiment. This anger towards the banks has been partly worked up by governments wishing to deflect attention from their own huge mistakes in controlling the money supply and regulating the banks in 2005-09. The rest was brought on by excessive behaviour by the banks themselves. This is not the right time in the economic cycle to throttle credit and clobber banks, popular though it may be politically.
The EU sees this as a time of huge opportunity to regulate “Anglo Saxon capitalism” and is ready with a big raft of measures to control financial activities in a way which will drive more of them out of the EU altogether. The European Central Bank is adamant it will not solve the problem of inadequate money growth anytime soon, though its hands could be forced by markets again.
In the UK the government has taken some welcome steps to assist recovery. It is cutting the Corporation Tax rate to 24% from 28%. It has cut Labour’s planned increase in National Insurance, cut the small business profits tax and promised a review of IR35. It has started to cut Labour’s planned increases in public spending and the huge deficit that went with them.
The measures which have attracted cross party support are less helpful to recovery. The government has confirmed Labour’s hike in Income Tax to 50%. Labour has supported raising Capital Gains Tax to 28%. All main parties support the tax on bank balance sheets, a tax which will limit the banks’ willingness and ability to lend credit to companies for expansion.
Any study of the UK’s recent economic history will show that the consensus measures have been the killers in the past. The Exchange Rate Mechanism was a three party act of vandalism on the UK economy introduced by a Conservative government which understandably took the main public anger for it. The so called independent Bank of England was a Labour measure which Conservatives supported which led to the biggest post war boom and bust in money and credit.
Fortunately the present range of cross party policies will not do damage on anything like that scale. One of the reasons consensus policies can be so damaging is they do not attract the degree of scrutiny, debate and criticism that contested policies attract. Politicians too readily adopt them, thinking that because they are cost free politically they should also be cost free in terms of their impact on a fragile economy. That is rarely the case.