Realist, not conformist analysis of the latest financial, business and political news

Memo To Phillip Inman – 1.25% Of The Economy Isn’t A Solution

UK tax to GDP

Phillip Inman in The Observer tells us that it’s rent that’s the problem. We can’t have all those nice things – infrastructure, modern broadband, a vibrant steel industry – because all the money to pay for such is being eaten up by rent.

Well Phil laddie, why not try doing some sums? 1.25% of the economy really isn’t going to make that much difference to all this. That is, rent isn’t the problem you’re making it out to be.

The eclectic and long wish list goes on and on, spanning calls for a sophisticated border force ready to keep out illegal immigrants and a national superfast broadband network to making sure that the Royal Navy, which has admitted that a quarter of its 76 ships are unseaworthy, has enough money to refit them.

These bills add up to hundreds of billions of pounds over the next 20 years, a period when the population will age and Brexit will chase away many of those companies that have stationed themselves in the UK exactly to benefit from access to the EU.

Horrors, eh?

All of this might be affordable if we weren’t paying such high rents to the owners of Britain’s land and property.

The US, France and Germany have their property hotspots, yet most of the land remains cheap and rents in large cities can be still be affordable.

In the UK, we are all shelling out huge sums on rent and mortgages that could be used to pay tax on collective goods and services, or to buy those goods and services directly.

In 2017, the total amount of rent paid by tenants in Britain soared to more than £50bn, more than double the level seen a decade ago.

It’s the rent what done it.

Now we need to do what Our Phil doesn’t do. Which is odd, because he’s supposedly an economic correspondent for a major national newspaper. What we’ve got to do – what he should have done – is examine the argument for its veracity. A useful way of doing this being to examine the claim.

One useful point being that the economy is not a one iteration game. Money paid in rent does not just disappear. Those receiving it have to either invest or spend it. There is nothing else – other than the Scrooge McDuck skiing option – to do with money. You either spend it on building something for the future – investment – or spend it on something to consume now – spending.

So, money paid in rent circulates just like any other chunk of cash does. It doesn’t disappear from the economy at all.

But perhaps rather more importantly consider the amount that is being whined about. £50 billion is some 2.5% of a £2 trillion (-ish) economy. That doubling is therefore an extra 1.25% of the economy being paid in rent. That’s not a great deal of a terror actually.

How do we know that it’s not a terror? Because that’s about the sort of amount that tax has risen in only the period 2015 to 2017.

UK tax to GDP

OK, alright, alright, 2014 to 2017 if you prefer.

Now, has Inman been screaming how joyous this is that another 1.25% of GDP is being fed into government to buy all of us nice things? Nope, not that I’ve seen. Therefore Inman doesn’t believe that 1.25% of GDP is the solution to our ailments, does he? Therefore 1.25% of GP going in rent to further circulate around the economy isn’t the problem. QED.

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