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Brief thoughts on tax credits.

June 17, 2010
(Brief thoughts- written v quickly- will write properly later)
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Tax Credits have a misleading reputation.
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They are seen as the fluffy benefit, designed to appease our social conscience, stopping people who work, living in poverty.
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In fact, they have been a very important economic tool in the past 13 years.  They encourage demand, they encourage participation in the labour market. They are a means by which taxpayers money has supported taxpayers businesses, taxpaying families, and taxpayers children. Most British families have seen some benefit, but more importantlyALL British businesses have benefitted.
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A lot of growth in the past 13 years came from unsustainable private borrowing based on the release of masses of capital from a property bubble that doesn’t appear to have burst yet. THe cost of that borrowing has been transferred to the public balance sheet. And we want to cut the thing that allowed people and businesses  to weather the storm it caused, and supports economic growth?
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The housing bubble  is partly prevented from bursting, because people can afford their mortgages, because they receive tax credits. What happens when they can’t? Alongside the cuts in housing benefit (much of which is paid because the average cost of housing, is so far out of step with the average wage)- what will happenwhen these two benefits cease to subsidise the housing bubble?
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Isn’t letting some of the air out of the housing bubble supposed to be gradual adjustment of the housing market-rather than it bursting because the reposession rate goes through the roof?
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Families being lifted out of poverty was a by product of the state subsidising low wages  paid by the private sector-  demand created, businesses grew. THe benefits of poverty being reduced are a by product of a policy which had enormous economic benefit.
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People kept in the labour market, businesses supported (not just the ones on the FTSE 100-although they have done fairly well out of it). Self employed people get tax credits, meaning that even when their earnings are unstable, they can still trade, because their work guarantees a minimum standard of living. Aren’t these people our economy? Our real economy?
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But if I was a monetarist, I would say that tax credits need to be rolled back…
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By increments at first. Just those ‘high earners’ eh? Just those single parents who should be  married anyway? Hang on a mo, why should the state give money to people who can’t be arsed shitting diamonds?
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We are at the end of a period where a great deal of money has been spent on preventing inflation- we have printed our own money, we have poured money into banks, kept interest rates artificially low. THe private sector is still stagnant and not hiring- and inflation is about to be a big risk.
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There is a relationship between high unemployment and inflation- wage suppression, and unemployment curb inflation- by forcing people to spend less. VAT rises raise revenue while doing the same.

Tax credits mean that lower wages etc are not automatically translated into lower spending- mainly because tax credits mask the gap between our incomes and how much it actually costs to live.

You can’t use unemploymen/low wagest to curb inflation if people are not suffering from it.

Tax credits might be the protection british people have, from the whims of the financial market. The protection british businesses have, from catastrophes caused when the market goes wrong. Supporting the real economy, not the FTSE 100.

But protecting people from the whims of the financial markets removes the ability to use unemployment as a tool that can be used in management of a market economy.

If you offset wealth creation, against wealth destruction, and tangible benefit to the british economy, I bet quid for quid, tax credits have created more wealth than the bank bailout which would have paid our tax credit bill dozens of times over.

That would be daft, that would imply that public spending had some tangible benefit to the economy…..much easier to cut it when people think they are just subsidising the poor and lazy or greedy…

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2 comments

  1. […] This post was mentioned on Twitter by paulstpancras, Lisa. Lisa said: @paulstpancras https://deeplyflawedbuttrying.wordpress.com/2010/06/17/brief-thoughts-on-tax-credits/ […]


  2. It really is business as usual. People don’t matter, only markets do. Any politician in government will say the same – it’s status on the global stage that matters, being seen to be tough on inflation and keeping the markets happy. There is no other priority. It seems just as before there are two economies in the UK: the City economy (the one that matters) and everything else. It hasn’t really changed since Salter Walker’s step-change in the early 1970s when people became business assets in the same way a desk or a chair might be. I cannot see why it will change now.



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