Author Archives: Lucy Parsons

Vince Cable has stood out as an advocate of extremely sound economic policy while his counterparts have floundered. He predicted the housing collapse, he warned that the UK’s debt-binge was unsustainable and he was the first to take a decisive stance when Northern Rock collapsed. But the Liberal Democrats’ support for a stimulus of £30 billion – to include tax cuts for the low-paid and public spending increases – in next week’s Pre-Budget Report is entirely the wrong step.

As Reform’s new report shows, the academic evidence is that rather than boosting the economy, a stimulus could in fact cause long term damage to confidence by unbalancing the public finances further.

Secondly, it would not work. A public spending stimulus would take too long to take effect and would crowd out private spending, while tax cuts are more likely to be saved than spent. Higher tax credits would actually increase the marginal cost of work for people on low incomes.

Thirdly, we simply cannot afford it. The true level of debt is at least 60 per cent of GDP once the major “hidden” liabilities (e.g. Northern Rock, PFI) are taken into account. We have the 4th highest structural deficit in the OECD, and when the Government’s large long-term spending commitments on pensions and education are factored in, the UK already faces tax increases of £100bn – that means £4,000 for every British family.

Vince Cable also proposed tax increases on richer people to fund this stimulus. Art Laffer, the senior American economist, has said recently that this would actually weaken the public finances further, because rich people can reduce their ability to pay taxes whereas poorer people cannot.

However, the Liberal Democrats have also embarked on a programme of research on public sector productivity which seems to be better than the other two Parties. Its results should be very timely.

This is the right step. To keep the recession and unemployment to a minimum, the Government’s short term objective should be the same as the long term path to economic growth – to increase productivity. This should be the theme of the Pre-Budget Report and of Budget 2009.