The 2017 Budget was presented yesterday and as has been our practice, we will provide a framework for the average citizen to analyse the presentation and be able to follow the debate that will follow. Firstly, we must appreciate the type of economy we have so we can decide whether the measures and spending introduced by the Budget will assist the economy to deliver what the Government stated at the beginning of its term: the “good life”.
We have what is called a “mixed economy” – one that combines characteristics of market, command and traditional economies. It benefits from the advantages of all three while suffering from some of the disadvantages. While market economies stress the role of business as the “engine of growth” and the operation of the market using supply and demand to set prices of the goods we buy, the Government has a critical role to play in strategic areas from a “command” standpoint, beyond the usual regulatory role it plays.
The “command economy” in its extreme form was introduced by the People’s National Congress (PNC) in the 1970s when the Government nationalised 80 per cent of the economy and private industry utilising market forces were miniaturised. This was reversed from 1989 when most of the nationalised industries were privatised. The Government was now supposed to perform three major “mixed economy” functions, in which the annual budget plays three critical roles.
These are to allocate or encourage the allocation of resources in the most efficient manner to deliver growth and development; to redistribute the national wealth in a more equitable fashion; and finally, to collect and spend revenues for the national weal. Thus, with the present Budget, we should first look for measures introduced to deliver “growth and development”.
Over the last few months, the Government met the Private Sector organisations, which uniformly informed the former of the low level of activity into which the economy had sunk. They recommended what has been the standard policy in the toolkit of mixed-economy governments – stimulus of the economy. These had been proposed and successfully implemented from the Great Depression by the economist Lord Keynes. But the policies had fallen into disfavour with the introduction of free-market fundamentalism from the late seventies. But with the world economic collapse in 2007, the ideas of Keynes have come back into vogue.
So, more granularly, we should look for policies that would encourage spending in the economy. Typically, taxes by the Government on businesses discourage their expansion while subsidies encourage it. Taxes should, therefore, be reduced so that more money remains with businesses and citizens. These funds can then be spent to initiate a virtuous and ever-increasing cycle of demand stimulating production. Interestingly, this will generate overall increased tax collection by the Government on the larger amount of economic activity. While the Government has said there would be no new taxes, that would not be enough: there needs to be substantial tax cuts to have the desired, stimulatory effect.
The Government can also encourage investments in identified areas of the economy through appropriate policies. Take the sugar industry where the Government has closed Wales Estate and will soon close another three that will result in 7000 workers losing their jobs. In addition to those workers not earning incomes to even live a “subsistence life” much less the “good life”, the Government would not be collecting taxes from those incomes nor revenues from the sugar industry it owns. Wales was supposed to become the model for transitioning “sugar workers” into independent “farmers” of crops that would deliver greater revenues and taxes. We should scrutinise the Budget for these policies.
In terms of the redistributive function, it is elementary economics that the pie must be made larger for effective, sustainable redistribution. We must scrutinise the Budget to discern whether redistribution outweighs stimulation and for equitable Government spending across all groups. That would be the surest way for a further contraction of the economy and increased social tensions.
