The Markets

So here we are, still faced with a huge deficit, and although it has come down over the past few years, it is now showing signs of flat-lining and even rising slightly. The Tories claim they have the answer, and I expect Mr Milliband says the same although he just forgot to mention it, and we await somewhat wearily the views of the others. So are we stuck in a funk and unable to retrieve the situation and just doomed to be sucked into the Slough of Despond?

Well we only have to look over the pond where we can see that despite also having a large deficit, albeit lower than ours, the Americans have slashed their shortfall from 9% to now a tad under 2% which means that given the current inflation level the economy might even start to be able to manage its leviathan pile of debt.

However, perhaps we should look at an economy of a more comparable size to our own. California back in 2011 was being compared unfavourably to Greece as an economic basket case by presidential candidate, Mitt Romney. However, since then this American Greece has engineered a remarkable turnaround over the past three years. California’s deficit of US$24bn has been obliterated and replaced by an anticipated surplus this year of US$4.2bn.
So it can be done. But how?

Mr Brown, the Governor who took over from Mr Schwarzenegger, put forward an idea in Proposition 30 whereby there would be an extra income tax on the rich and a nudge up in sales taxes to increase revenue – but only for a short period of time and it would actually expire in 2018. Of course this may sound like a sensible solution, but in effect it will only have a temporary impact that the rich pay more until the budget is straightened out. However, that will only work, in the meantime, if you both reduce the ongoing cost base and increase the longer term revenue more permanently. The key difference in California, it would appear, is that a lot of their revenue is derived from individuals’ gain on the stock market and thus in a raging bull market, the state will benefit but equally suffer in a bear market.

So what can we learn from this? Well, a short term tax deal can provide a short term wave of income but that just buys some time. The key elements lie with tight economic controls and at the same time encouraging the wealth creators in the entrepreneurial world. Let them make the money and then you can put a fair tax upon it. Without the wealth being created, there is obviously nothing to tax anyway!

Exert from Justin Urquhart Stewart, 07.10.14, www.7im.co.uk