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Sean Speer: Don’t learn the wrong lesson from the U.K. government’s tax cut reversal

Commentary

Writing about the British government’s recent tax and spending package is a risky undertaking. The political fallout is still fast evolving including sharp criticism from influential Conservative MP Michael Gove that the proposed reductions to the top personal income tax rate were “a display of the wrong values” and the government’s subsequent retreat from its controversial proposal.

There’s plenty of reasons to criticize the government’s plan. Its failure to offset the deep tax reductions for corporations and individuals with accompanying spending cuts would have ballooned the annual deficit and massively increased the country’s public debt. Estimates from the independent Institute for Fiscal Studies were that Britain’s debt-to-GDP ratio would grow as a result from just over 80 percent to nearly 95 percent by 2026-27.

There’s also the clumsy and ineffectual communications that the prime minister herself has conceded. It’s not obvious based on the government’s presentation that these particular tax reductions were optimal or that the costs in the form of greater government borrowing, eventual spending reductions or even alternative policy choices (including public investments in science and technology) were worth the short- and long-run economic benefits.

Yet if the government’s plan deserves a defence, it’s against the weak and wrong-headed argument that its tax cuts are intrinsically bad because they aren’t progressive. The International Monetary Fund’s warning that the government’s corporate and high-income tax cuts “will likely increase inequality” is representative of this lazy line of argument.

It reflects a new and unproductive tendency to score every policy choice against the goal of equity — as if the only credible purpose of state action ought to be advancing equality. According to this increasingly dominant thinking, it’s no longer enough for the overall system of tax and transfers to be progressive. Now every single policy itself must be so-called “equity enhancing.”

While equity is a key rationale for government policymaking, it’s far from the sole one. Economic efficiency, which broadly refers to the optimal allocation of resources in a market economy, is also an important policy objective. But one would be forgiven for not knowing that lately. Policy considerations about efficiency (or imperfect yet popularized descriptions like economic competitiveness) have come to be subordinated in the political process over the past several years.

A good example is the huge gulf between the tax-cutting policies of the Chretien government at the start of this century and the tax-hiking policies of the current Trudeau government. The former’s 2000 Fall Economic Statement set out a series of pro-efficiency tax cuts, including lowering personal income taxes, corporate taxes, and capital gains taxes, that amounted to the “largest tax cut in Canadian history.” While it was part of a larger set of tax and spending initiatives that were broadly progressive, the Chretien government wasn’t afraid to make the case that tax policy ought to “provide incentives, not impediments” to achieve the goals of investment, entrepreneurship, and wealth creation.

The Trudeau government, by contrast, came to office arguing in favour of higher tax rates on high-income earners and has since applied an equity lens to virtually all of its policymaking. The Chretien government’s case for positive-sum growth has seemingly been replaced with a zero-sum focus on redistribution.

It’s not even precisely correct to say that the new emphasis is on equity. It’s a particular form of equity which narrowly concerns itself with the distribution of taxes and spending across income groups. It’s not really concerned, for instance, with horizontal equity which reflects the goal that households with similar abilities to pay ought to ultimately pay similar levels of taxation. The Trudeau government scrapped its predecessor’s income splitting policy that sought to equalize the tax treatment of households with children on the simple grounds that it was a “tax break for the wealthy.”

It’s difficult to discern precisely when our politics became equity obsessed. Attention to these issues seems to have taken off in the context of the 2007-08 recession and Barack Obama’s insurgent candidacy in the Democratic Party’s presidential primary. Since then, however, it’s evolved from a useful corrective to the rise of economic inequality in the 1990s and early 2000s into an overarching political economy framework that dominates Western policymaking and our overall political debates.

The Truss government’s highly-imperfect and clumsily-executed tax cuts were a brief challenge to this prevailing orthodoxy. They represented a rightful recognition that the Western governments’ overfocus on demand-side redistribution has failed to deliver higher rates of economic growth and that a recalibration to a more supply-side agenda is required to boost growth and dynamism in an era of economic stagnation. The proper mix of supply-side policies as well as how best to pay for them in a constrained fiscal environment is where our policy and political attention ought to be dedicated.

This column started as a principled defence of some of the underlying thinking behind the Truss government’s ambitious supply-side agenda. It’s ended as something of an obituary for its now partly defunct plan. Hopefully the lesson for policymakers in Canada and elsewhere isn’t that the U.K. government’s basic insight about the need for a renewed focus on growth and dynamism was itself dead wrong.

Policymaking must of course concern itself with the goal of equity. But equity without efficiency is hardly better than efficiency without equity. It’s ultimately a recipe for long-run stagnation and zero-sum polarization. We need to restore a healthier balance to our policy and politics.

Richard Shimooka: Putin is playing a bad hand, but Europe is in for a hard winter

Commentary

The past several weeks has seen some dramatic shifts in the state of the Russian-Ukrainian war. After a summer that saw Russia take much of Donetsk and Luhansk in the east, Ukraine has executed a dramatic counter-offensive near Kherson and Kharkiv, retaking significant parts of its territory.

In response, Russian President Vladimir Putin has opted for a new approach to the war. His prospects to win a military victory in Ukraine under the present circumstances are limited. Western support has solidified Ukrainian armed forces to make any battlefield collapse unlikely. Furthermore, Western sanctions are increasingly taking serious bite out of Russia’s economic stability and ability to manufacture high-tech military hardware, meaning it cannot afford to sit in a stalemate indefinitely.

Denied his initial objectives of the complete conquest of Ukraine, Putin must salvage what he can, partly to avoid potential domestic fallout and threats to his regime’s stability. It is evident that Russia has recalibrated its policies in light of this new reality, guided by Putin’s understanding of his country’s political, economic and military situation.

The first step was its partial troop mobilization, largely an effort to stabilize the military situation in eastern Ukraine. Even before the war, the Russian Army faced serious manpower shortages, which were set to be exacerbated in the coming months, with tens of thousands of contract soldiers reaching terms and mustering out. Raising new units from mobilization, especially when comprised of poorly trained call-ups, is unlikely to create the conditions of victory. But it can frustrate further advances by Ukraine by sheer mass.

Mobilization entails significant risks for the regime. Since the start of the invasion, the Kremlin has carefully managed its domestic situation to husband its political support, which includes refraining from the deployment of conscripts and avoiding excessive casualties among units drawn more heavily from regions in western Russia.

The decision to mobilize is a crossing of the Rubicon, showing that the Kremlin understands its precarious military situation and judges it to be a greater threat than the domestic unrest its announcement has created. To be clear, however, military mobilization can only stanch the figurative flow of blood and it is not a path to victory. Rather Putin’s other decisions and statements are critical for finding a way out of this morass.

For example, the sham referendums in occupied Ukrainian territories would justify their annexation into Russia. This potentially sets up the terms for any future settlement between the warring parties. By claiming the territories currently under partial control, he has marked out a very large part of what a settlement would entail, while retaining them as bargaining leverage. Ukraine has already rejected such an outcome. This is certainly understandable, given the immense support it receives from the West and in light of its recent battlefield victories.

To achieve its aims, Russia must therefore break this alliance and force Kyiv to accept less. Before the invasion, Putin clearly viewed the West as weak and feckless, a view bolstered by his successful interventions and destabilization efforts internationally over the past two decades. While Western nations support for Ukraine has been extremely durable, Putin still seems to see the possibility that Russia can divide the current alliance supporting Ukraine.

The new strategy has been largely aimed at Germany. With the United Kingdom leaving the European Union, Berlin is now the preeminent power within Europe and the lynchpin of the European alliance supporting Ukraine. By peeling Germany from the united front, Putin likely hopes to force the Ukrainian government to moderate its demands and find a settlement. It would also provide political cover for Kremlin-friendly states within the EU, like Hungary, to openly advocate for pro-Russian positions.

Germany also has several vulnerabilities that can be exploited, not least the country’s reliance on Russian energy and its unique political sensitivities around its history. Finally, Putin has practical experience when it comes to dealing with Germany, going back to his time as a KGB officer in Dresden during the 1980s. As such, he likely feels an intrinsic understanding of the German situation that can help guide his strategy.

Whatever the case, Russia has sought to acquire as much leverage as possible. Russia’s most effective tool remains energy, having been wielded effectively for the past three decades. Germany is uniquely vulnerable to this challenge. Years of deliberate decisions on the country’s energy mix has left the country highly dependent on Russian gas supplies for electrical, heating and industry. While Berlin has made a commitment to phase out Russian energy sources by 2025, its supply situation for this coming winter is precarious and record prices threaten Germany’s economic and political stability.

Russia’s motivation to sabotage the Nord Stream pipelines may initially seem counterintuitive, but it clearly fits within this strategy. First, the destruction of Nord Stream does not prevent Russian gas from entering Europe. Sufficient capacity remains between the other pipelines: no gas has passed through Nord Stream since the end of August. Rather its destruction constrains Europe’s options to Putin’s benefit. Russia has also threatened to close gas pipelines through Ukraine over a legal dispute. European gas storage facilities are currently preparing for the winter, making it an ideal time to create an artificial supply crisis that forces governments to prematurely tap into these reserves. This may help create greater shortages in the winter months, driving prices even higher and thus increasing Russia’s leverage.

This limits Europe’s overall flexibility. Some of the existing pipeline capacity is currently being used in an eastward direction to supply Poland and Ukraine. By crippling Nord Stream, much of the remaining capacity must be devoted to westward deliveries to ensure western European states can satisfy their energy needs in the winter. This will further isolate Ukraine and cause greater harm to their economy and will to fight, while damaging overall European unity. It also obliquely signals to European policy-makers that Russia may attack key infrastructure in the future, thus coercing them to reduce their support of Ukraine.

The plausible deniability of the attack is consistent with Russian intelligence services efforts — from assassinations to cyber warfare. While the intended targets clearly understand the message delivered, pro-Russian voices in the West can use it to support their subversive efforts, such as Tucker Carlson’s claim that the Biden administration was behind the pipeline attacks, based on the loose interpretation of a previous speech.

Even more concerning has been the repetitive and premature invocation of the potential use of nuclear weapons to defend Russian territory. Such threats seem hollow in practice. Ukrainian forces have repeatedly struck in depth against targets in Millerovo, Belgorod and Crimea, considered by Russia to be part of its territory, and yet produced no noticeable escalation in response. However, the threatening language has particular resonance in German politics, considering the country’s aversion towards nuclear power and weaponry, particularly within the ruling coalition. The direct threats and the fighting around Zaporizhzhia nuclear power plants can be seen as an effort to influence the German people and cow them into submission.

We must be clear-eyed about the prospects of this new Russian strategy — this is far from a winning hand. Having badly misjudged Ukraine and the West’s ability to contest this invasion, Putin has made a number of large assumptions and bet heavily on them. For Russia to succeed it requires a dramatic reversal in German, European and Ukrainian policies, while staving off domestic unrest from crippling sanctions and an unpopular military mobilization.

While Putin’s chances of pulling off this gambit successfully are slim, the West must not be complacent: it must adapt. Certainly, it cannot match the bare-knuckled realpolitik that Putin has engaged in, but should rather rely on their natural strengths in this conflict — specifically, overwhelming economic and military power, free and open societies that are highly motivated to support Ukraine, and the ability to develop creative solutions to difficult problems.

If Europe can weather this winter while maintaining or even expanding its support for Ukraine, it will be in a much better place to see this war to a successful conclusion.