Temporary tax cuts make a lot of sense in terms of stimulating demand - provided that infrastructure spending is ramped up meanwhile, as generating additional employment through public spending will probably be more effective in getting us through an economic slump than tax measures. A VAT cut is reasonably sensible, although some of the commodities that the poorest people are most likely to buy - e.g. food - are zero-rated, and so will actually be relatively more expensive relative to other goods than they are at the moment.
The proposal for a 45% income tax rate after the next election to help (a little bit) towards balancing the government books in the long run is very welcome, and perhaps marks the death of the faux-Tory mutant known as 'New Labour' and its replacement with 'Newer Labour' - which seems to be a closer relative of Old Labour than its immediate predecessor. Which is no bad thing. The extinction of the legacy of Tony Blair (and of Gordon Brown's own past self) is limited, but essential.
But the £12 billion fiscal stimulus from the VAT cut, and the other smaller measures on the table, are really pretty small beer. They'll help a bit but we'll need a lot more in either higher spending or lower tax if we're gonna get out of a major slump without experiencing the kind of mass unemployment that wrecked huge swathes of the economy in the 1980s.
I still don't know if the government has really grasped the gravity of the situation. Its growth projections for 2010 are wildly optimistic, and out of line with all independent forecasts. In all likelihood the economy will still be contracting in early 2010, at least. But I guess these numbers can always be revised later, and the stimulus can be boosted in the March Budget if need be.
The borrowing figures are historically high, but then it's a historically big recession, and it's gonna hit the UK harder than most because we rely a lot on financial services. This isn't ideal but the government is making the best of a bad job. The Tory plan of just relying on automatic fiscal stabilisers and funding tax cuts through cutting spending isn't a stimulus package; it's just more of the same crap they were pushing between 1997 and 2005. Osborne was shit in the opposition post-PBR response. The Tories must be crapping themselves now... if polls this week show Labour ahead in the polls (or at least even pegging) election fever is gonna mount. And this time, Brown would be a fool to bottle out.
So it was a 'small action' but with scope for more down the line if need be. However, Vincent Cable hit the nail on the head pretty well on Channel 4 News tonight (as so often - why is this man not leading the Lib Dems? They would probably be at 30% or more in the polls if he was.) The main priority is to get banks lending to businesses - not necessarily at 2007 levels (that may be impossible) but at much higher levels than what's happening at the moment, which is feeble. If the govt needs to go for full nationalisation of a major bank or two to do that, then go for it. A modest fiscal stimulus ain't gonna do jack if the entire credit system remains seized up despite the re-capitalisation of Lloyds TSB/HBOS/RBS.
2 comments:
This is a curious post, as much of it is praiseworthy, but still you cling to the notion that excessive government expenditure will assist us in solving the present crisis when it has in fact been the root cause.
Let's start with points of agreement. I think Vince Cable is one of the few politicians of any party who actually earns the salary and unmatchable pension rights he receives. Some front bench ministers (Harman, Smith ,Blears) would be extremely hard pressed to find gainful employment cleaning toilets. Cable has the advantage of having earned a living (crucially) in Private industry, and as almost all the sensible politicians share this characteristic (or have worked in the productive part of the public sector) there's a strong argument for making this a mandatory requirement to stand for Parliament. Cable has diagnosed the crux of the issue regarding bank lending. As you say, given that the government decided to step in rather than as I think it should have done, let the banks go under, it can surely now go the whole hog and just buy them out and literally nationalise the insolvent banks. Given the recent fiasco where bank chiefs were 'summoned' to insist they pass on the recent interest rate cut to mortgage customers,this would at least be an honest solution.
I also agree that the goivernment has singularly failed to grasp the situation's gravity. Where I part company is in your analysis of the PBR. As I attempted to post on the Telegraph yesterday. This was surely the moment when people searching for comparisons with the administration (at least in terms of competence) were forced further into the Tudor and Plantagenet era. Currently the only comparator I have is the government of Charles I, but this masterpiece of fiscal swindling surpassed even his financial ineptitude. Oh, how I long for a new 'Lord Protector' now! The truly terrifying thing about your comments regarding an election is their accuracy. The Osborne response to this Report was jaw-droppingly poor. It would appear the Tories are content to let Labour lose power through a series of own goals whilst offering up nothing. As I said, were this rabble to win an election,(and in doing so damage the country beyond the ability of anyone to repair it) do historical records exist to go back far enough to find a legitimate comparison in terms of competence? King John? Edward I? Truly, the mind boggles!
To the report itself, nowhere did I see anything on such crucial issues as Public Sector waste, massive overmanning and (the cuckoo in the nest) Pension liabilities, which in the last case make even more of a mockery of Treasury figures than most independent analyses. To put it bluntly, we need to slim down the size of the Public Sector (hugely), and whilst infrastructure expenditure carefully targeted (Ie Crossrail) might have some role to play in combatting the slump, in reality, the only long-term solution is a far,far smaller state with a much more limited role in the lives of its populace.
Just taking this very welcome comment post in against the equally welcome background of Mo Dutta's Radio 2 show (I like an early start Saturdays).
I think a fiscal contraction along the lines you are suggesting (i.e. cut public spending) would make the recession much worse while also endangering key public services. Some commentators (e.g. the normally quite sensible Peter Oborne in the Mail have been arguing that the Howe/Thatcher 1981 strategy is the way to go: raise taxes (although they couldn't cut spending at the time because there were so many people out of work that spending actually went up). I think that, as in the early 80s, this would actually prolong the recession (although there was some recovery from 1983 onwards, unemployment did not start to fall until 1986.)
For most of the people I know in the public sector, working life is not the doss job you seem to think; huge efficiency measures (the Gershon review) and cutbacks in staffing (NOT 'massive overmanning') have already made life very difficult, and the PBR shows that this is set to continue. Public sector management (particularly NHS) and the tendency to hire vastly overpaid consultants who know f*** all is the only area where your comments ring true.
Also, the crisis was NOT caused by a too large - or too inefficient - public sector. It originated in under-regulation of the financial system, which led to a huge boom in assets that were only worth anything when the economy was inflating in an unsustainable bubble (e.g. sub-prime). Even the right-wing commentators I have read agree that this is the root cause, not the size of the state (although some of them do see the size of the state as a longer-run cause for concern.)
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