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In today’s newsletter:
Why do the OBR’s warnings keep falling on deaf ears?
Schools of Economic Thought
Wealth taxes are still a bad idea
It is hard not to feel some sympathy for the Office for Budget Responsibility. At least once a year the independent fiscal watchdog barks another warning that the UK public finances are on an unsustainable path. Nonetheless, successive governments have been unable, or unwilling, to take the actions necessary to change course.
The OBR’s latest ‘Fiscal (Un)Sustainability Report’ was no different. If anything, the risks are now even greater, with the UK government’s cost of borrowing consistently the highest in the G7, and no sign that welfare spending will ever be brought under control.
Too many subjects are still taboo, such as real reform of the NHS, or unpicking the ‘triple lock’ on the state pension. Politicians must be more honest with the public about the costs and trade-offs involved. But voters also need to be more willing to listen and stop endulging in ‘cakeism’, expecting the government to keep doing more without having to bear any additional burden themselves.
There has even been speculation that the UK could eventually require another IMF bailout, reminiscent of the situation in 1976. Although such an outcome remains highly unlikely, the mere discussion of this possibility is telling.
Major economies with their own central banks and borrowing in their own currencies typically do not require external assistance. While the UK's public debt to national income ratio is currently about double what it was in the 1970s, the country is not experiencing a balance of payments crisis; the pound remains stable, and both inflation and interest rates are significantly lower than back then.
Most importantly, the IMF bailout in 1976 was a US dollar loan intended to meet international obligations and support sterling, rather than to service local currency debt.
Instead, two big changes are needed to turn the public finances around – and over time they are still possible. First, the state should become smaller and more efficient. Second, and related to this, productivity has to improve across the whole economy.
On unchanged policies, public debt is already heading for an eye-watering 270% of national income within 50 years, even if productivity growth recovers to average 1.5% per year. But if productivity growth remains weak at recent levels around 0.5%, the OBR report showed that this figure could explode to 647%.
That should really set the alarm bills ringing. But is anyone listening?
Julian Jessop
Economics Fellow
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IEA Podcast: Executive Director Tom Clougherty, Editorial Director Kristian Niemietz, and Director of Communications Callum Price discuss the OBR’s report, fantasy economics on left and right, and wealth taxes, IEA YouTube
An Introduction to Schools of Economic Thought
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Modern economics education has "forgotten its own history", focusing on mathematical models rather than understanding different approaches to economic problems
A new book explains how ten major schools of thought offer different solutions to economic challenges
It reveals how Austrian School economists predicted government policy failures decades before they occurred, while Keynesian approaches dominated discourse despite systemic flaws
An Introduction to Schools of Economic Thought, published by the Institute of Economic Affairs this week and authored by Eamonn Butler, traces the evolution of economic ideas from Ancient Greece to modern Behavioural Economics. The book demonstrates how different schools of thought, including the Classical School, Austrian School, Chicago School, and Keynesian approaches, offer radically different explanations for how economies work and what governments should do about economic problems.
Watch Eamonn Butler on the different schools of economic thought on the IEA YouTube channel
News and Views
A wealth tax would be economic suicide, Tom Clougherty dismantles the logic behind a wealth tax in The Times
“A wealth tax is unlikely to help the government’s fiscal position much in the short term, given implementation challenges and the behavioural response it would cause. In the longer run, it would be yet another hit to economic growth – a self-inflicted wound that leaves us all worse off.”
Book review: “The Trading Game” by Gary Stevenson (2024) | ||||||
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Plus: “The Impact of Inequality on Asset Prices When Households Care About Wealth” by Gary Stevenson (2019) | ||||||
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Don't let anybody tell you that the cost of this can be covered by taxing other people, Callum Price lays bare the scale of our fiscal problem on TalkTV
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UK Smoking Ban and Black Market Chaos, Catch up on our event on the generational tobacco ban, IEA YouTube
The idea that we can just fork out a large sum of money to satisfy one group of workers is I think very short sighted', Len Shackleton on the doctor’s strike, LBC
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Why do we have high energy costs? We've actively restricted the supply of energy ... these problems are the government's fault, Reem Ibrahim breaks down Britain’s self-inflicted energy crisis on TalkTV
What’s so bad about a wealth tax? Kristian Niemietz answers in CityAM
“If the government is concerned about wealth inequality, there is a much simpler way to address that issue: build more houses. That would effectively “redistribute” property wealth, while growing the pie at the same time. Don’t tax wealth – multiply it.”
Britain will follow Australia into a crime storm with the Tobacco and Vapes bill, Chris Snowdon laments in The Telegraph
International Programmes Manager Harrison Griffiths was in Lviv, Ukraine.
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Last week, Harrison spoke at the Ukrainian Renaissance Conference in the city of Lviv. The conference was co-hosted by Students for Liberty, the Czech Institut Liberálních Studií, and the Whetstone Freedom Fund's Ukrainian partner, Ukrainian Students for Freedom. Harrison spoke about Britain and Europe's efforts to rearm and support Ukraine, emphasising the need for economic growth to support defence against Russian aggression.
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