Political commentary
Budget psychology
Ferdinand Mount
In unravelling imbroglios, Jeeves always found it helpful to consider 'the psychology of the individual.' Denis Healey, more ambitiously, claims that 'I always took account of the psychological effect of my actions on the British people'. Where Jeeves would merely attempt to assess the course of action likely to be taken by, say, Aunt Agatha or Sir Roderick Glossop, Mr Healey, it seems, managed to size us all up together. And indeed he regards it as his most damning criticism of Sir Geoffrey Howe's figures that 'they do not add up socially, politically or psychologically and for this reason they cannot add up economically.' On TV he went so far as to claim that 'their failing is guaranteed.' A somewhat ill-advised guarantee, I fear, Sir, as Jeeves might have said; one recalls the case of Lord Colyton. This kind of amateur psychologising is all the fashion among both the critics and the fans of the Budget.
Cutting income tax, according to some of these psychologists, is unlikely to inspire British managers to work harder. This curious diagnosis of the psychology of the individual embraces pessimists of all parties. Mr Joel Barnett, Labour's Chief Secretary to the Treasury, believes that executives may simply blow the money on the golf course. Mr Peregrine Worsthorne, looking round his wide circle of friends, sees none of them as likely to increase output in response to lower income tax; most of them would rather spend the money on a few extra pints or — to eschew the demotic — a more potable Beaune. Even for Mr Sam Brittan, although he favours low taxes for libertarian reasons, 'the matter seems rather unimportant' because whether through PAYE or prices in the shops, the ordinary family still pays roughly the same amount of tax. This view is the corollary of the theory I first heard propounded years ago by Mr Douglas Jay — and he was propounding it again on Monday evening — that if you put taxes up, people will have to work harder to 'make up' their income.
And Mr Jay was nodding away vigorously when a few minutes earlier, even Mr Enoch Powell argued that tax rates have little or no power over human nature which is 'incommensurably' too 'subtle' and 'complex' to be altered by any adjustment so 'material and mechanical.' Yet when the BBC invites Mr Powell to broadcast on the World at One, does he ponder long on the subtlety and complexity of the question? No, he asks — and quite briskly, one gathers — How much?
How does this decidedly rum view come to be formed, directly contradicting as it does not only personal experience but also the collective experience of almost every country in the world? There are, I think, three different confusions at work here; the pessimists have confused total income with marginal income, the transitional with the normal, and uniform tax rates with progressive tax rates.
If we were all taxed at a uniform rate of 90 per cent on all income, then a man would indeed have to work like blazes to feed his family; by contrast, if tax was uniformly 10 per cent, then he could choose whether to ease off, after having satisfied his immediate wants. But income tax is very rarely levied at a uniform flat rate. Almost everywhere, the rates are stepped. And the steeper the steps become, the less worthwhile it is to climb each extra step. If the cliff face becomes nearly vertical beyond a certain point, then it is worth climbing further only for the pleasure of planting flags and demonstrating physical fitness. Most Western countries, now including Britain, have accordingly set a plateau at between 50 or 60 per cent so that all earnings beyond that rate are taxed at the same substantial but not prohibitive rate.
This Budget's big increase in VAT has made most people only slightly better off on their existing income. And the next f they earn will be less heavily taxed than it was and will accordingly be more worth having.
But during the transition and only during the transition for top managers and their ilk, the pessimists' argument is fleetingly tenable. High earners have just received a net addition to their spendable income of thousands of s. They therefore can choose: whether to work for still more of this crisp new lettuce to jog along as before or actually to earn less and still make up the same net real spending income.
But even for the big fish, with inflation running at its present rate, the privilege will be eroded after a couple of years; therefore, high and low earners alike will be under the same relative incentive to earn more. The origin of the confusion probably lies in the paradox that the high-paid — for whom the Budget was supposed to offer the strongest incentive — in fact receive the weakest, to start with. We do not need to dabble in the psychology of the individual to argue this far.
But won't trade unions, seeing that the government's own estimates of the rate of inflation this coming winter have already reached 171 per cent, be tempted to ask for pay rises of 20 per cent or more to cover themselves? They may or they may not. The trade unions did take a 'psychological' battering last winter; and the benefit of the Budget will all be seen in the husband's pay packet, while its pinch will be felt by the wife in the shops and in the absence of a second increase in child benefit. So, as it is mostly husbands who go on strike, they may feel 'psychologically' less militant than they did when the government was attempting to control their wages. But what matters above and beyond these psychological imponderables is whether the government has the will to take corrective action if pay settlements do run too high. The individuals whose psychologY really matters are not businessmen or trade unionists but the half-dozen politicians who run the economic departments—prima inter impares, the First Lady of the Treasury. It is the strength of their nerves, their sense of realism we have to guess it. Will they refuse to play either ostrich or Micawber when the trouble comes?
The first really reassuring answer came from Mr John Biffen, the Chief Secretary to the Treasury, in the most memorable speech of this fledgling Parliament. Whey memorable? I can in fact remember scarcely a word of it, but I have seldom heard such a deathly hush in the House. How does he keep them quiet? Mr Biffen hesitates, no, he halts. Nor is his manner commanding or exuberant; he speaks in a low-spirited tone like one recently bereaved, even if an occasional chuckle escapes him as though he was due for a legacy but it would not do to gloat. But they listen because he does not varnish or vary. In opposition, he praised Mr HealeY's progress towards monetary discipline; ia government he still does. Same with the EEC.
He always said the Continentals were bleeding us and he says so still; and what" ever Mrs Thatcher may say about boosting supply, he thinks that the prospects for economic growth are 'only very modest'. For all the shaky sums in this first Budget, as long as Mr Biffen stays at the Treasury this government will not stray too far from the path of financial prudence. Mrs Thatcher, unlike her predecessors, has it in mind to entrench a new orthodogi And no more admirable trenching too could be imagined than the first econoMist she has ennobled, Mr Ralph Harris, the Director of the Institute of Econotoie, Affairs. After the long succession °it economists lorded for monkeying atoti with the market, the Kahns and Keyneses, the Baloghs and Kaldors, here is the first for, years (indeed the only one I can think 1 offhand, except Lord Robbins) who is cleti's cated to exploring and blazoning the ment. of the market. Mr Harris, a figure of era!, almost military bearing, with his tattersal,ts_ check waistcoats and his undousabloe enthusiams, is not unlike those seers en used to advertise in the Sporting Lift: le Sealed Selections for Royal Ascot Rased on Exclusive Inside Information (remember,' only the Major gave you a 25-1 double) s And considering how the free market Os derided when the IEA started, he ha indeed tipped a long-priced winner.
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