Why the deficit control measures given by UK Prime Minister David Cameron suspiciously point to his lack of understanding of economics
Ronald Reagan, the 40th American President once avowed in the context of rising US deficit, “I’m not worried about the deficit. It is big enough to take care of itself.” The relevance of this statement lay hidden in a clearly less than astute understanding of deficit economics that Reagan had (something that led to the term ‘Reaganomics’ becoming common sarcastic usage), which had its basis on the key points of reducing marginal income tax rates, regulation, money supply and unfortunately government spending too. While reducing the former two was considered pro-growth, for the rest, it was considered suicidal for economic growth. Fortunately for the erstwhile Hollywood actor, the baby boomers in US ensured that the nation had years of consecutive growth, with or without his policies.
On June 22, 2010, when David Cameron, UK Prime Minister, presented the UK budget through Chancellor George Osborne, it seemed an unbelievable replica of Reaganomics – capital gains taxes not raised for basic rate taxpayers, personal income tax allowances increased by £1000 to £7475, higher rate taxpayers’ income tax rates unchanged but capital gains tax increased to 28%, and corporation taxes cut too. The logic being forwarded by Cameron and Osborne is that by 2015, the budget deficit – which is currently at 11.5% of UK’s GDP – will be “in balance” by 2015. Yes, part of what he’s saying seems brilliant – especially the tax movements (leave the illogic of not increasing the higher tax payers’ rates).
Even during his campaigning days for the UK Prime Ministerial elections, Cameron used the deficit card and it worked successfully. After winning, Cameron has tried hard to continue holding the placard, as he indicated in a speech on June 7, 2010, “The most urgent issue facing Britain today is our massive deficit and our growing debt.” In that speech, Cameron kept harping on the fact that while UK currently pays around £35 billion annually as interest payments, the amount was expected to go up to £70 billion annually in the next five years – something that he wanted to control urgently.
Ronald Reagan, the 40th American President once avowed in the context of rising US deficit, “I’m not worried about the deficit. It is big enough to take care of itself.” The relevance of this statement lay hidden in a clearly less than astute understanding of deficit economics that Reagan had (something that led to the term ‘Reaganomics’ becoming common sarcastic usage), which had its basis on the key points of reducing marginal income tax rates, regulation, money supply and unfortunately government spending too. While reducing the former two was considered pro-growth, for the rest, it was considered suicidal for economic growth. Fortunately for the erstwhile Hollywood actor, the baby boomers in US ensured that the nation had years of consecutive growth, with or without his policies.
On June 22, 2010, when David Cameron, UK Prime Minister, presented the UK budget through Chancellor George Osborne, it seemed an unbelievable replica of Reaganomics – capital gains taxes not raised for basic rate taxpayers, personal income tax allowances increased by £1000 to £7475, higher rate taxpayers’ income tax rates unchanged but capital gains tax increased to 28%, and corporation taxes cut too. The logic being forwarded by Cameron and Osborne is that by 2015, the budget deficit – which is currently at 11.5% of UK’s GDP – will be “in balance” by 2015. Yes, part of what he’s saying seems brilliant – especially the tax movements (leave the illogic of not increasing the higher tax payers’ rates).
Even during his campaigning days for the UK Prime Ministerial elections, Cameron used the deficit card and it worked successfully. After winning, Cameron has tried hard to continue holding the placard, as he indicated in a speech on June 7, 2010, “The most urgent issue facing Britain today is our massive deficit and our growing debt.” In that speech, Cameron kept harping on the fact that while UK currently pays around £35 billion annually as interest payments, the amount was expected to go up to £70 billion annually in the next five years – something that he wanted to control urgently.
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Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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