Rachel Reeves And Bad Economics

The incoming Labour Government, we are told, is looking to economic growth to drive us forward towards the Brave New World of not being a member state of the European Union, but performing considerably better than under the last days of the Tories. But new Chancellor of the Exchequer Rachel Reeves doesn’t seem to have figured her economic basics.

While some in the media class tell anyone listening that Ms Reeves at 11 Downing Street means that the grownups are back in charge, she steadfastly refuses to move the one lever of the economy which would almost immediately generate more economic activity, get the economy growing, and would be hugely popular with many of Labour’s voters.

So we arrive at the Two Child Cap. This relic of Tory austerity was imposed to limit the payment of child benefit to a family’s first two children only. Its imposition means that, from the third child onward, no child benefit will be paid. This has left many families struggling, and has made them the target of bad faith actors in the right leaning part of our free and fearless press.

SHOULDN’T HAVE THEM IF THEY CAN’T AFFORD THEM comes the plaintive refrain from obscenely overpaid hacks and pundits, few if any of whom have recently, if ever, been in the situation faced by many of the families affected, many of which are both “in work” and still having to rely on the generosity of food banks. The solution is glaringly straightforward.

And that solution is to remove the Two Child Cap, paying for the extra expenditure by taxing the very well off. It is, whisper it quietly, a no brainer. Moreover, it is plainly redistributive: it takes a relatively modest amount from those with a strong Propensity to Save, and gives to those with a rather stronger Propensity to Spend. An explainer on this is required.

Rich people get a tax break? They already have more money than they need, so are most likely to save the additional funds. Hence Propensity to Save. The less well off, on the other hand, almost always have less money than what they need to support a half decent lifestyle, so any extra is going to be spent, and in short order too. Hence their Propensity to Spend.

Additionally, the well off will notice a small reduction in their overall wealth less than those less well off. From there it can be seen that the imposition of the Two Child Cap effectively removed purchasing power from the less well off - thus reducing economic activity. Removing the Cap will immediately restore spending power to the less well off. More economic activity follows.

After all, the effect of removing the Two Child Cap is not dissimilar to that of giving less well paid workers a pay rise - the propensity to spend is strong, and yes, economic activity will be heightened as a result. That pay rise has been “hinted” at by Ms Reeves. But still the Two Child Cap is clung onto, as if an act of economic redistribution would cause the sky to fall in.

This matters: how the Chancellor acts will tell us whether this Government really wants to improve the lot of those at the bottom of the pile, or whether it’s merely a case of the new authoritarianism behind the Labour leadership telling the world “nah, not doing that, cos that’s what Trots do”.

Removing the Two Child Cap is an economic no-brainer. If Rachel Reeves wants to be both competent and consistent, she must act. That is all.

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