The Guest Blog

Guest Blog: The Spirit of Keynes Is Alive and Well

Professor Moorad Choudhry, Head of Business Treasury, Global Banking HKSCKPVIamp; Markets, Royal Bank of Scotland

After the euro zone, the most common topic of this column has been the labor market. Unemployment is the biggest single issue for developed economies, now and for the next several years at least, and it has been disappointing, to say the least, to see the lack of effective response from policymakers so far.

Winston Davidian | Photodisc | Getty Images

This week in the UK we have had measures being announced that target job creation in the small business sector, but from a subsidy perspective.

The principle appears to be in effect incentivizing companies to hire staff or create apprenticeships via a government subsidy, the cost of which is borne by increased taxation or reduced government spending elsewhere.

So it appears that the ghost of John Maynard Keynes (or indeed, Gordon Brown) is alive and well and infusing the ethos of the UK government with the spirit of demand management.

As we have noted before, some influence from the Chicago school and an emphasis on the supply side would be a welcome change, both in the UK and the euro zone. The biggest employer in any developed economy is the small business sector, and they don’t need to be subsidized to take on staff (a false job creation scheme anyway as it is investment-distorting).

Simply reduce the cost to them of adding staff, and the red tape associated with it, and the process will occur naturally.

A one-year freeze on all payroll taxes for SMEs would work wonders, either a blanket suspension or one that only targets 16-24 year olds. Add to that a suspension of the minimum wage (again, say for a year) and that would be icing on the cake.

A suspension of employer national insurance contributions for all new hires is a “cost” to the government only in an accountant’s sense of opportunity cost foregone. It is less distorting than an employer subsidy from the government, and will act more quickly.

It also means unemployed people no longer drawing social welfare benefit and paying taxes. The logic is irresistible.

One suspects that there is still a prevailing culture in the EU of governments having to be seen to be “doing something” to address urgent problems, and by “something” we mean spending tax dollars, when often this something might actually be to do less, in the form of reduced bureaucracy, and to not necessarily spend money to generate a solution.

In a free market economy corporations will act as rational economic investors and seek to expand in the natural course of business. Removing the barriers to this expansion, and making it cheaper for them to do so, is a more effective mechanism than paying them to do what comes naturally.

This brings us on to the concept of income tax and tax credits – the logic of which entails taking X from an individual in income tax, and then returning [Y% of X, with Y < 100] to the same individual as a tax credit. Perhaps “logic” is the wrong word to describe this, but lets leave that debate for another day…

The author is Professor Moorad Choudhry Head of Business Treasury, Global Banking & Markets, Royal Bank of Scotland.