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RIP-Real Incomes Policy
Thematic note

Why super-deductions cannot work

Hector McNeill1

The recent exchanges between Bank of England representatives and the Treasury Committee contained a good deal of waffle. The BoE expressed surprise and disappointment in the fact that the government's super-deductions do not appear to have had the impact on investment and productivity that was expected.

This lack of impact was entirely predictable from past evidence as well as over 40 years of Real Income Policy development.

In the parallel attempt by both the Reagan and Thatcher administrations to introduce so-called supply side economics of reducing marginal tax rates, most of the windfall funds ended up in the pockets of executives. To be fair, some gains in productivity were obtained in some companies but the associated raising of interest rates to unprecedented levels killed off any serious raising for finance for investment. In fact, in both cases, these policies resulted in severe prejudice with thousands losing homes and family farms as a result of repossession.

It was the likely associated prejudice created by conventional policies that motivated the initiation of development of what became the Real Incomes Approach in 1975. Almost 47 years of development of real incomes theory and policy propositions have been undertaken. Also, I have worked for a similar period dealing directly on international investment project design, management, appraisal and end of cycle evaluations.

As a result of this experience, it is very apparent to me that any initiatives like super-deductions are no more than give-aways associated with no undertaking on the part of those receiving them to raise productivity. Such initiatives are more a vote-harvesting technique than a serious attempt to increase investment geared to increased productivity. If it was not such a cynical move, it was, on the other hand, extremely naive reflecting a lack of practical experience with the real world.

Real Incomes Policy ties reduction in levies directly to a combination of immediate unit price reductions and productivity enhancing investments. The logic is simple. To sustain price moderation or reductions on a profitable basis companies are obliged to raise productivity. This is not a dirigiste or top-down policy since it is a transparent structured policy framework entered into on a voluntary basis by companies and work forces who agree to operate under these conditions. The reason companies would be willing to participate is that the issue of maintaining profitability while investing is managed by the variation in levy linked to actual price changes. As a result the risks to investment are reduced but companies must enhance productivity to continue to enjoy their cash flow streams. Price moderation, even in generally inflationary conditions, will result in competitive market penetration by the companies participating in the scheme. This effect alone helps raise consumer real incomes because their purhasing power rises for the items subject to the Real Incomes Policy.

1  Hector McNeill is director of SEEL-Systems Engineering Economics Lab

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