We hoped that last week’s election would result in a Conservative majority in the UK. We are pleased that it did. We now know that the new pensions freedoms will stay with us; that the welfare system – and in particular the tax credit system – will continue to be reformed; that there will be no mansion tax, no rent controls and no rises to the top rate of income tax or to national insurance; and that the margins of private companies are no longer at risk of being determined by the whims of public-sector staff.
We were also pleased to see numbers out this week showing wages and employment rising again. As Roger Bootle notes in my interview with him, the UK looks to be in a perfectly “reasonable position”.
However, look a little deeper, and you will see that we aren’t without our problems. John Stepek looks at the UK’s fiscal situation and the nasty consequences (prepare for capital gains tax to be equalised with income tax); in my interview, we talk about the possibilities of inflation being used to deal with our debt; and Jonathan Compton looks at just how hard it is to escape from the super-easy monetary policy that the UK, along with much of the rest of the world, has been living with for the last seven years. Quantitative easing (QE), he says, is rather like the Hotel California: “you can check out, but you can’t leave”.
He doesn’t much mind in the short term – the more QE you get, the more markets soar, and like all investors, Jonathan likes that. But over the longer term it really matters. Why? Because as we have discussed here before, it subverts capitalism.
One of the central principles of capitalism, as Martin Hutchinson of breakingviews.com points out, is that “capital allocation is the most important function of the free market”. If capital is “made essentially free or subsidised” as it is now, then “no care will be taken in its allocation and projects will be taken that make no economic sense”.
The results surround us. There is oversupply in most industries, which has made us all fret about deflation. Labour productivity is pathetic – lower in the UK than in the midst of our 2008 recession. And too much capital is being used for “leveraged speculative games” as opposed to long-term investment.
Want evidence? Read Matthew Lynn’s description of the reflating of the Spanish economic bubble. Or perhaps read (again) about the dangers inherent in the way the hunt for yield and safety has exaggerated the global bond bubble.
The point is this – we are pleased with the election result. But we would like to see more from this government than from the last. We’d like to see a genuine plan to cut the size of the state to sustainable levels; to sort out the UK’s debt problem; and to normalise interest rates so that capitalism can work as it should – allocating capital in such a way as to make us all better off.