Good politics is bad economics

GOOD economics, it is invariably claimed, is good politics because voters do reward governments that soundly manage a nation’s finances.

However, to turn this phrase on its head, there is no guarantee that good politics is good economics – as shown by David Cameron’s well-meaning, but potentially flawed desire to limit executive pay.

While the notion will find favour with the “squeezed middle” who continue to pay a heavy price for the slump and deficit reduction measures, the Prime Minister must be careful that a desire on his part to indulge popular opinion does not punish successful entrepreneurs, the people who will make or break Britain in 2012.

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Mr Cameron’s difficulties became self-evident yesterday when he said there were executives who were worth £2m a year because of their contribution to the economy, while many on low or average incomes will contend that no-one, however talented, is worth that amount of money.

It gets even more complicated when legislating on this issue. The PM says he wants to empower shareholders – but there have been many past instances when these individuals, either through apathy or a lack of transparency on the part of the companies concerned, have not been emboldened. What happens if this attitude persists?

And then there’s the very definition of executive pay. The political elite clearly believe that they must target the City of London – but Yorkshire taxpayers might want to limit any increase awarded in future to a council chief executive whose town halls fails to empty the bins on time or the privately-run train companies that deliver unreliable services despite being the recipient of vast public subsidies. Should the public sector be exempt from any new laws?

As such, Mr Cameron must ensure that his strategy hits the right targets and does not unduly penalise wealth-creators for reasons of expediency. Given this, the PM should consider beefing up the powers and responsibilities of non-executive directors – and order the Treasury to get to grips with the super-rich elite who use their wealth to dodge their tax-paying responsibilities. That would make good politics. And economics.