Iain Duncan Smith: politics, not economics

The resignation of Iain Duncan Smith dominates headlines, and for good reasons: the narrative that the Bullingdon Club boys in the Conservative government are looking after their rich chums while pillaging the disabled plays well. Cutting disability benefits while raising the 40p tax threshold and cutting corporation tax seems to play into the hands of the stereotype. But looking behind the headlines, the question to ask is not about tax rates and benefit levels, but what kind of society is most beneficial for everybody; the low paid, the disabled and the better off.

And the answer is simple: a dynamic, entrepreneurial, free market society raises living standards for all. High productivity benefits the lower paid. A rich society can afford to look after the less fortunate. There has never in history been a better society to be poor in than the western capitalist economies. Socialist experiments have always produced poor outcomes for everyone, especially those at the bottom of society.

In that light we see that cutting corporation tax, known to be a drag on productivity, is beneficial to the poor as well as the better off.

High marginal taxes have detrimental effects on incentives, leaving all of society poorer. Any cut should be welcomed. And since the 40p tax rate threshold has hardly been touched since the days of the last Labour government, it is trapping an ever larger proportion of taxpayers due to inflation. Thus marginal taxes have actually been rising.

It is true that a silly promise to “triple-lock” pensions is tying the hands of the Chancellor, who is restricted in his search for savings in the welfare budget. But the total welfare budget has to be addressed if the deficit is to be cut: welfare gobbles up 35% of total government spending (pensions alone is a massive 20%). Whether the PIP (Personal Independence Payment) was the right place to cut is more politics than economics.

All in all this story is about politics, not economics. The real danger is that the caricature of the Bullingdon boys protecting their own directs the debate towards a narrative of rich vs. poor. More preoccupation with redistribution can only be damaging. The chancellor is trapped, not by his latest move, but by being inept at putting forward the more difficult argument that production comes before sharing of the spoils.

Posted 22 March, 2016

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