JOINING THE EURO WILL DEMAND A RISE IN TAX

Andrew Smithers, Chairman of fund manager advisers Smithers & Co wrote an article by this name in London's Evening Standard, 18.06.01.

We reproduce excerpts below with comments at the end.

The message for Britain's Government is simple. If it wants to join the euro, it must put up taxes.

The Governor of the Bank of England has tactfully waited until after the General Election to point out two obvious things. First, sterling must fall against the euro to make entry possible. Second, a fall in sterling will push up inflation.

It is widely believed that Gordon Brown has been a prudent Chancellor. This is a myth. If he had been, inflation could have been kept down without driving up the pound. His high-sterling policy has been disastrous for industry and agriculture. If he had been truly prudent, taxes would have been higher or public spending lower. This would have lowered domestic demand and allowed room for more exports and a lower exchange rate.

Now that public spending is due to rise much faster than output, the necessity of raising taxes is even more obvious. Output needs to shift from private services to industry and public services. This means reducing the demand for private services. There are only two ways to do this. One is higher interest rates, the other is higher taxes.

But we cannot plump for higher rates if we want to join the single currency, because it will probably keep the pound too high and because, simply, we cannot join with higher rates than Europe.

Although it is not one of the Treasury's five economic conditions, everyone knows the level of sterling is really the key. This shows that the conditions are bogus. They have been drawn up for political not economic reasons. They are designed to fudge the issue and avoid real debate over the euro.

The Bank of England is there to stop inflation rising. Its Governor, Sir Edward George, is gently underlining its determination to do the job. As sterling must decline for us to join the single currency, such a fall must not be allowed to result in a rise in inflation. This means that domestic demand must be weak enough to be pushing prices down.

The chances are that the Government will do nothing. It will find it difficult to put up taxes because, firstly, it can no longer blame the previous Government. Secondly, it means the Chancellor will have to admit to being wrong, which he does not appear to welcome. The third reason is that it will make it harder to win the referendum.

If the Government does nothing, domestic demand may fall off anyway. This will not be easy, as the rise in public spending will boost demand. But the need for higher taxes would still be there, because the budget deficit would rise sharply.

Domestic demand can only fall if either taxes or savings go up. But private consumption is taxed much more than savings or public spending. So if savings rise, tax revenue falls. As previous Chancellors have found, falling revenue and rising spending means trouble.

Comment:
Well said, Andrew. One way of reducing public spending at next to no cost to vital public services would be to axe preparations for joining the Euro, which is positively unwanted by 70% of the electorate, including the majority of Labour voters. The figure of £200 million over three years for the NHS alone has been estimated in the media.