British Politicians Understand Neither Inflation nor Economic Growth

After weeks of bad omens, we finally have the autumn budget. Yes, it is as bad as predicted—more taxes, more spending, more empty promises. Nothing new or unexpected. The funny thing is that the government keeps claiming that they will deliver more growth and less inflation. These wild statements have made me doubt anyone in the government understands what growth is or what causes price inflation. This budget will neither tackle growth nor inflation.

Production and Growth

Growth is not an increase in GDP, as this measure has many problems. Real growth in an economy means more economic activity, that is, greater private production and exchange of goods and services. That is how we should measure growth. My quality of life is better than my grandparents because I work less and get more in exchange.

Necessarily growth implies improving production—producing more with less by doing it better. The only way to do this is, by the capitalist mentality, saving to invest in capital goods to improve production. The incentives for this only happen in a free market where people compete to attract customers and only profit through serving their specific preferences. This constant competition and improvement has created our modern economies, with high levels of material wealth and better working conditions.

There is no other way to grow. As Professor Bastos—an economist from Santiago, Spain—says, “saving and hard work, there is no other way to prosperity.”

Inflation

Here I refer to “price” inflation, and I am fully aware that inflation should mean an increase in the money supply.

There are two ways in which an economy can suffer from price inflation. The first is what economist Milton Friedman referred to as being always and everywhere a monetary problem. This is what used to be termed inflation, where commercial banks and the central bank increased the money supply. The central bank runs the printing press to pay for interest on bank reserves. It also does it to buy government bonds to fund the government deficit. The same goes for when it loans money to commercial banks. Commercial banks in turn use fractional reserve banking to increase the amount of monetary units further by using the same deposits to fund multiple loans. Understanding Money Mechanics by Dr Murphy explains this in detail.

More money does not increase wealth, it increases prices and transfers wealth to early recipients and spenders of the new money and credit. Whenever there are more monetary units within an economy, prices will increase unevenly, distort the structure of production, transfer wealth, and reduce the value of the monetary unit.

But there is another possible cause of price inflation that Friedman did not envision. It is the loss of productivity. If with the same input we produce less, there are fewer goods and services for the same amount of money, therefore, prices will increase. This happens when, for example, taxes increase. For instance if a business produces 1000 televisions per month but is burdened with a tax, then production will decrease and prices will tend to increase, all other things being equal. Extrapolate this to the whole economy. If income taxes increase, those taxed will have less to spend, save, or invest, affecting their decisions.

UK Autumn Budget

Going through the whole budget would be too taxing, no pun intended. We can however summarize two details. The government claims the budget will reduce inflation by 0.4 percent, and will help GDP growth go from 1 percent in 2024 to 1.5 percent in 2025. This means the government is either lying, or they do not understand what growth or inflation are.

Taxes Tax the Economy

Government interventions or spending cannot produce economic growth. They may influence GDP numbers, but real growth cannot be achieved by the government. Every pound the government uses is first taken from someone. The unseen opportunity cost is that that pound could have been used to buy something, it could have been saved, or it could have been invested to improve productivity.

Every pound the government takes costs the private sector in administrative fees. Bureaucrats collect taxes, do accounting, move money from account a to account b. All this is unproductive spending. Then, that pound—instead of going to something that people want—goes to something the politician wants. Even making this budget is a net loss. The pound taken in taxes is lost in unproductive endeavors and whatever pennies are left for the actual investment or expenditure, is in something people do not want. In fact, given its nature, government cannot invest because it must take from existing wealth produced by the private economy. When governments tax and spend, the people get whatever the government decides, whether they like it or not. Due to absence of competition, we cannot get the most efficient use of that money.

Taxes take real resources and waste them. They are not only a waste but a burden on the productive actors in the economy. A company is deprived of their full profit that could be used to improve production, even though this profit has been obtained through voluntary exchanges. Productivity is reduced by taxes.

The autumn budget increases taxes in a number of key areas. Income tax is increased, affecting all the productive parts of the economy. Investment is penalized as taxes on savings and dividends are increased to “close the gap between tax paid on work and tax paid on income from assets,” as if this was a good thing.

Thus the result is more money wasted, less incentive to invest, and less overall purchasing power for people. Added to inflation, this budget will damage growth significantly. If there is any real growth over the next year it will be despite government interventions, not thanks to them. This budget just deepens the anti-growth policies that are typical of socialist governments.

Inflation

There are two ways to begin to meaningfully deal with inflation. One is to stop printing money, and the other is to depress the productive economy enough. This budget completely ignores the first option and doubles down on the second. By increasing deficit spending and not doing any real savings, they will still print a truckload of new money—close to £140 billion. And that is not counting that the extra income estimated to be collected through new taxation is wildly optimistic.

In any case, the government is doing nothing to tackle the real causes of current price inflation, except to attack production and print money. Blaming inflation on high gas prices (the high peak of 2022 and 2023 long gone), or on supply chain issues (which again disappeared years ago), is intellectually dishonest. The main cause is current and past government policies. The way to solve the “cost of living crisis” is to stop those policies.

Conclusion

The UK autumn budget will deliver more inflation, less growth, and more misery to normal people. Claiming the contrary is either blatant ignorance or intentional dishonesty.

In a post-Brexit UK, the British government is following the same failed policies that are destroying the European economies and making people poorer. This budget is continuing this trend and reminding us that both government and most of the governed neither understand economic growth nor inflation. As Professor Bastos has said, it is wealth that needs to be explained; poverty is the normal human experience. We need to explain how wealth and growth are achieved and how interventionism destroys them.