Time to be Brave

Since we last spoke about him, Gordon Brown’s “unelected-mandate” government has gone from bad to worse. And finally, the public are more susceptible to the truth. The Hacks are slowly printing and broadcasting this truth, too.

The truth I speak of, is the truth of just how imprudent and incompetent Gordy actually is.

This blog has long since covered Gordon’s many stupid mistakes (remember his fiasco over selling off a ton of our gold? He announced to the world that he was going to do it – so guess what happened to the value of gold?).

David Cameron’s Conservatives have been totally right to criticise the government on this issue. While the government is right that the global economic conditions are something that to a certain extent can’t be helped by an individual countries government, it does prove that “boom and bust” exists and is inevitable in any economy. Labour have long since said that going back to the Tories and their policies of “boom”, will only lead to “bust” eventually. We can now say (as many of us always have) that boom & bust occur regardless.

The only difference with the Tories boom, is that it ends up generating a slightly larger bust. But the boom should (and always does) totally offset the bust. Imagine Black Wednesday happening now. We don’t have the resources to cope. But back when it did happen, we had the ‘fat years’ to get us through it.

Again, where DC and Co. are also correct, is that most other Western democracies around the world are asking a very different question than our government. They are asking “Gee, times are tight, luckily we’ve saved all this money for a rainy day. Now how do we spend it so that our people are hurt by the crunch as little as possible?” The Tories are right to point out that our government can’t ask this question, because Gordon Brown as squandered all the other money we made during that time. The British cupboard is bare.

But this doesn’t go far enough.

The Tories now, more than ever, need to sell their plan of helping us cope. Things could be much worse in 2010 when they may take office, and they need to reassure the public that they have a sound policy that will not only help us survive the storm, but will provide prosperity when the times are good again.

All of the plans for welfare, etc. that have been described in general terms need now to be (slightly) more concrete polices. These are policies that will improve public services and the general welfare of the British people, while saving us a great deal of dosh. Government will need to tighten its belt, and these Tory plans can both do that and improve things too. They need to be ‘sold’ to the public in a spirit of liberty and optimism. I still think David Cameron can pull off a ‘Barack Obama’ in this way.

The other side of things have to come in the form of tax breaks. For too long, the Hacks and government have let the economic truth of the supply-side system be presented as a lie. It’s time for that to change.

Think of it this way. There are two countries, A & B, who both generate the same level of tax, by having the same tax-rates. Business A lives in country A and makes widgets. Business B lives in country B and also makes identical widgets. They are both taxed on profits of $100k at 40%, making their governments $40k each year. Going along at that level for 3 years, the government would make $120k to invest in public services, and save for a rainy day.

Now imagine country A elects a government with a mandate for the economic liberalism that the Tories could introduce. Suddenly, the corporation rate is slashed to 25%. That year, Business A is able to keep more of the money it makes, investing in the business and in its people. The staff earn more (so ultimately pay more in taxes, even though their rates are lower too), and the business is able to employ more people (taking people off welfare which saves the government money) and buy more raw materials.

With the economies of scale therefore, the widgets it makes are sold for less. Because everyone else in country A is experiencing this same economic boom, they buy more of Business A’s widgets.

At the end of year one, Business A makes $150k. At year two, $200k, by year three, it posts a pre-tax profit of $270k. At the rate of 25%, the government makes a total of $248k. Remember if it had not slashed the tax rate, and stuck with the ‘stable’ 40% rate, it would have only made $120k off that business.

Now imagine country B elects a government with a mandate for the economic socialism that is being described by some of the left-leaning Hacks and the Labour government as the ‘only way’ to escape our current threat of recession.

Suddenly, the corporation rate is raised to 60%. That year, Business B has to give the government more money in taxes, leaving less to reinvest in the business and in its people. The staff earn less (so ultimately pay less in taxes, even though their rates are higher too), and the business has to let some people go (putting more people on welfare) and they can only afford to buy less raw materials.

With the economies of scale therefore, the widgets it makes are sold for more money per widget. Because everyone else in country B is experiencing this same economic recession, they buy less of Business B’s widgets.

At the end of year one, Business B makes $75k. At year two, $65k, by year three, it posts a pre-tax profit of $45k. At the rate of 60%, the government makes a total of $111k. If it had not slashed the tax rate, and stuck with the ‘stable’ 40% rate, it would have made $120 off that business.

That is the supply-side economic model, in basic generalised terms. It’s bold. It’s scary. It works.

Come on Tories. Show us your strength. It’s time to be brave.