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Could the UK economy implode?

Several times a week I receive emails with scare stories about the imminent collapse of the UK economy. Most of them come from outfits trying to sell subscriptions to expensive investment advice magazines so they need to be taken with a pinch of salt. But some regular journalists are asking the same question, as here.

All of these gloom-and-doom forecasts draw attention to the same fundamental issues. Private and public debt remains at record levels. The economy is in the doldrums, with record levels of unemployment. It has failed to respond to Quantitative Easing, the government’s chosen instrument for stimulation. Economic stagnation has affected the government’s tax revenues and is leading to growing debt. There is no scope for tax rises under the present tax system because these will further reduce economic activity due to their deadweight cost.

These considerations leave the government with fewer and fewer policy options.

It looks as if it will be forced back on that of inflation. This will achieve a measure of economic recovery, since its effect is to reduce real rental levels, thereby protecting landlords with mortgaged properties from the necessity of crystallising their losses by accepting realistic rents at current money values.

The cost will be that savers will be robbed of the purchasing power of their nest-eggs, and the process itself could run out control. This is precisely what happened during the 1970s. Inflation was 9% in 1973, 16% in 1974, 24% in 1975, 17% in 1976, 16% in 1977, 8% in 1978, 13% in 1979, 18% in 1980 and 11% in 1981, with money losing 70% of its value over the seven year period. The process was only checked by IMF intervention and the monetarist policies of the early Thatcher years.

A repeat of this would then push unemployment levels back up again, as happened at the start of the 1980s. So nothing would have been achieved, at great cost to individuals and families. This will lead to social unrest and disturbances, probably much worse those of 1981, the year of the summer riots. Then followed a recovery of sorts, a boom at the end of the 1980s and a collapse in 1991. That was not a success story.

The underlying problem is that the system is inherently unstable. In times of recession, tax revenues fall whilst government liabilities rise. At the same time, because the tax system leads to deadweight losses, taxes cannot be increased because that will make matters even worse. So the disaster scenario is a reality.

The only way to be certain that it will not happen is to replace existing taxes by a national tax on the rental value of land. This is not a change that could be implemented quickly but a switch from Council Tax and UBR to a national land rent charge is feasible and would provide the Chancellor with room for manoeuvre because the this tax does not result in deadweight losses. It would also give something of a kick-start to the economy by making landlords price their vacant commercial properties competitively and get them back into productive use.