The Tory budget: Too little, too late

The Tory Budget, tackled section by section

Let us begin with Stamp Duty….not a lot to say here. It’s a nice move with good intentions: to benefit first time buyers who inevitably have lower incomes. However, we are faced with a housing crisis. That crisis consists of two things:

  1. Lack of houses/not enough being built
  2. High house prices

Is this move going to solve either of those? No, it will not (indeed there is a suggestion that this will increase house prices). But it is certainly a step in the right direction; making it easier to buy your first house. 9/10 for good intentions. 4/10 for positive impact. We would have been naive to expect much more from the Tories in terms of resolving the housing crisis.

Moreover, giving councils the ability to charge 100% council tax on empty properties is another empty move; if you can afford to own an empty house, you can afford to pay the council tax on it. Why not use some government intervention to disincentivize owning multiple homes, thus increasing the supply of homes without having to build anymore. Or why not build enough affordable homes so that all those that need them can afford them?

Moving onto National Living Wage. We see a nice increase here. A Tory theme; nice idea, but it’s not really going to help. A 33p increase per hour is hardly ground breaking, but still, 10/10 for effort. Again it’s a watered down Labour policy lacking guts.

Growth forecast is down, this shouldn’t surprise us. This is arguably the ‘Brexit effect’, although the UK has seen depressing growth forecasts for many years before Brexit. For those who believe the poor economic growth is down to the government, let me give you some A Level economic theory. There is a school of thought that suggests that each nations’ economy has a ceiling. It will only ever be so strong. We have seen the UK’s economic growth slow in the past decade; there are those who believe that is because we are reaching the limit in terms of the size of our economy, whereas a nation such as China that has a far higher year on year growth, still has plenty of growing to do before it too reaches its limit. I’m not saying I support this argument, but it’s an effective evaluation of poor growth forecasts. Saying this UK is the worst-performing advanced economy in the world this year. Brexit really has caused a downturn, and the chancellor has set aside £3 billion to cope with the Brexit problem.

The state of borrowing:
To explain this, I am first going to provide another A Level economics chain of argument: borrowing money (which both Labour and Tory governments do), is a form of austerity. Let me explain. When a government borrows money, it pays back debt interest on that borrowed money. That means that every year until the government pays back that chunk of money in full, the economy is suffering in the short term. Let’s have a hypothetical example. A government somehow manages to borrow £100bn. In the short term, they would have a lot of money to play with, and would suddenly be able to fix our beloved NHS, end austerity, and cut income tax for the poorest in our society. In the longer term (15 – 20 years) this would be disastrous. The debt interest on that £100bn would accumulate, and eventually, the lovely little pie chart we get each year on where our taxes go, would be full of one thing: debt interest. It should be noted that each year, the government HAS to pay this back, and they’re not actually cancelling any of the debt; they’re merely cancelling the interest that they have accumulated on that debt. They pay it back in the knowledge that the following year, the debt interest will be a little bit more.

With that in mind, the Tories have committed to borrowing less, which we like, but instead of borrowing money from banks, why not get charming individuals like Lord Ashcroft to pay their tax. As a result, we’ll have to borrow less money, which means less debt interest to come and bite us in 10 years’ time. For those Corbyn supporters out there, I remind you that solving austerity by borrowing more money is a short term solution. In the long term, it simply leads to more austerity, unless you invest it properly.

Another socialist school of thought argue that taxes on the rich should be higher, thus raising more money that we can use to improve the welfare of those worst off in our society. However, I present you with an interesting economic diagram. Behold the Laffa Curve.

It argues that there becomes a point when tax (whether it be corporation or income) should not be raised further, because doing so will decrease tax revenue. Time for another extreme example. Say the government raised corporation tax to 90%. Would that lead to a huge increase in tax revenue? No, because the vast majority of firms and businesses would simply jump ship, and stop operating in the UK, or find a way to optimize or even avoid their tax liability. Increasing the tax rate beyond a certain point does not lead to increased revenue, because corporations and firms alike will find a way of avoiding said tax.

Now the Laffa Curve certainly does need evaluating; it was conceived to justify Reagan’s huge cut in top level income tax, a move that was disastrous for the US’s budget deficit.

Other key points: some nice moves to address issues with welfare and pensions, but as ever, is it enough to make a difference to peoples’ lives? Perhaps not.

£2.8bn more for the NHS: this falls short of what the NHS needs, but again, a good move, and a step in the right direction. [id1] More money is needed for our NHS, but this is a good move, and will make a difference. Labour’s promise to fund our NHS in the last election. They pledged £37bn over 5 years; the issue however is they intended to fund it with ‘capital borrowing and tax increases’. Capital borrowing, as we have discussed can be problematic in the long term.

No mention of HS2, or a 3rd runway at Heathrow. One word on large infrastructure projects in the UK; as a society, we suffer from Nimbyism (Not In My Back Yard….ism). China is a nation with many flaws. But they get stuff done. When they decide to build an airport, they choose a location, give those who will have to leave their homes some money, and then build the airport. From mentioning building the airport to the first plane landing in 10 years at most. They get stuff done, and it’s good for their economy. In the UK, it has taken us 3 decades to get anywhere near building a new runway. Obviously, we shouldn’t be like China, but nimbyism is hypocritical; I’d love another runway so I can go on holiday quicker and for less money, but just don’t build it near my house.

Parting remarks; a solid 6/10 for effort from the Tories today. However, much of what has been announced will have a minimal impact. As others have said, the theme of the budget is ‘too little, too late’. The budget isn’t a ‘total disaster’ as I’ve seen some people argue, but nor does it ‘build a Britain fit for the future’ as the Tories are arguing. For those Labour MPs who have shouted it down, whilst of course I agree it isn’t ideal, and there are areas that need more money (the NHS), and areas that have been cut that shouldn’t have been cut (the Single Intelligence Account and the Foreign Office), I question to what extent Labour’s current economic plan would be able to provide a better budget. Labour need to up their game, and I’m willing them on.

Trump’s first real test of resolve

The current situation regarding the relationship between the US and North Korea is that of great tension. Trump is faced with a nation developing nuclear capabilities, and the motivation is widely believed to be to deter US intervention in Kim Jong-un’s regime.

The US are unlikely to try to topple the regime if North Korea could respond with a nuclear attack. Kim Jong-un sees nuclear weapons as the key to avoiding the fates which befell Colonel Gaddafi in Libya, and Saddam Hussein in Iraq. To the US, however, the concept of a nation not within NATO, i.e. not controllable, possessing nuclear weapons, is disturbing, and they would like to keep the number of nations that fit this criterion to a minimum. What an American administration cannot have is a North Korea that is capable of striking the US mainland.

In an attempt to achieve their goal, North Korea have been conducting regular missile tests over the past few years, with 12 tests since February alone. The legality of nuclear tests is a grey area. However, whilst for most countries the testing of nuclear weapons is illegal, North Korea, not being a signatory of any of the relevant treaties, is not bound by such laws. There are other complicating legal factors, however, so the US could potentially use international law as a justification for evasive action.

Throughout the Obama administration, the attitude to the tests was condemnation, while the general attitude was that it would not be ideal were North Korea to attain the capability, but since Trump has taken office, the tests have increased in frequency, and intelligence suggests North Korea are getting uncomfortably close to having a weapon capable of striking the US – some even suggest they are there already. It should be added that Japan and South Korea, both US allies in the region, are already very vulnerable.

Earlier this month, the Washington Post reported on research carried out by the U.S. Defense Intelligence Agency which suggested that North Korea had successfully developed nuclear warheads for missiles within reach of the US. In a move that shocked both Washington and the world, Trump responded robustly, stating that future threats would be ‘met with fire and fury and frankly power, the likes of which this world has never seen before.’ Whether being so provocative was wise it remains to be seen – Obama was too weak regarding North Korean missile tests, but you could argue Trump has gone too far in the opposite direction.

Since Trump’s statement, North Korea have developed a plan to launch a missile strike into the sea near to Guam, a US overseas territory. The situation therefore is on a balance. The key middle man in this therefore is China. Since taking office, the China – USA relationship seems to have improved under Trump, and China have vowed to defend the US if North Korea launched a first attack. If, however, Trump launched a preemptive strike, I suspect China would side with North Korea; it’s highly unlikely they’d remain militarily neutral.

Trump has a bit of a problem here. We know for certain that if North Korea were to strike Guam instead of testing a missile nearby, it would be an attack on US citizens and soil, and Trump would have to respond with force, lest he undermine the ‘fear factor’ in his country’s nuclear deterrent. The same would be true for the UK. If an aggressor attacked us with nuclear weapons, the only option would be to retaliate. If not, our nuclear deterrent would become obsolete and the ‘fear factor’ of our nuclear arsenal removed.

Having retaliated, Trump would therefore move to destroy the North Korean capability. Given that their missiles are land based, this would be fairly easy. It would be a case of wiping out the missile launch sites. Whether Trump deemed it fit to attack Pyongyang as well as the launch sites would probably depend on the death toll in Guam. However, it should be stressed that whichever he chooses to destroy, he could do it using non-nuclear ordinance. This would be preferable. He’d destroy the target, whether it be the launch site or Pyongyang, without making the area uninhabitable with radiation fallout, and without radiation fallout into South Korea, a US ally. There is a possibility that a strike aimed at Guam could be neutralised mid-air, preventing loss of life. I suspect even if the US were able to destroy a missile headed for Guam, they would treat it as an act of war and would respond in a way similar to how they would if it had impacted Guam.

Throughout all this, the message from the Trump administration has been clear: we will try diplomacy, but if not, military options are on the table. This is exactly how one must act when faced with an aggressor. Try diplomacy, but if diplomacy fails, military options become real options. Joseph Yun, the US envoy for North Korea policy, and Pak Song, a senior North Korean diplomat at the country’s UN mission, have been in contact, and media outlets have also reported that Rex Tillerson, the Secretary of State, has also been in touch with Pyongyang.

On Friday, 11 August, Trump tweeted: ‘Military solutions are now fully in place, locked and loaded, should North Korea act unwisely. Hopefully Kim Jong Un will find another path!’ The key here is ‘should North Korea act unwisely.’ The military options to which he refers will not be used unless North Korea were to launch a first strike. The statement seems to therefore rule out a pre-emptive strike.

The best advice throughout the days and weeks ahead are to remain calm. Nothing is going to happen suddenly. It should be remembered that North Korea have nothing to gain out of attacking Guam, and will be well aware that to do so would be suicidal on a national scale. Trump may seem mad and unpredictable, but in fact I believe he has shown in this latest episode that he is predictable, and will do what is necessary to keep America – and the world – safe.

What angers me are references to World War Three. Should this boil over, and I stress that I see this as incredibly unlikely, the outcome will be the destruction of North Korea. No country will come to their aid, thus the term ‘World War’ is completely inaccurate. The situation is likely to calm down. Whilst the media have a habit of overreacting in international relations and spreading panic, this is likely muscle flexing and nothing more. Trump’s handling of the situation doesn’t worry me, nor does his access to the nuclear launch codes.