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.
This does not mean “crisis cuts” in public spending. It means a careful programme of reform to tackle the key inefficiencies in the public sector, notably workforce agreements and central control. The Chancellor should announce that his Budget next year will set out a new Comprehensive Spending Review – the last one was predicated on out-of-date GDP forecasts.
Private sector productivity must also be boosted. This requires a sustained transfer of resources and investment from the public sector. Key sectors need deregulation to stimulate growth and the promotion of competition is crucial.
Individuals will also be vital to an economic revival. Vince Cable has been warning for years about the UK’s chronic “debt-binge”. This not only lies with the Government and the public finances; households have also been consuming more than they have been earning. Total personal debt now stands at £1.5 trillion – more than UK GDP.
What the Chancellor should do is set a sense of direction towards a new economic culture: one of higher saving, lower taxes and high productivity. Individuals need to consume less and work more. But they need to be empowered to take control of their own lives, spend more of their own money and invest in their skills and careers.
Next year the economic downturn will worsen. The credit crunch will give way to a “consumption crunch” as households cut back and demand for goods and services drops. The output effect will lag, but employment effects will follow early in the New Year as firms get a shock from next year’s projected budget and profit/loss accounts. Unemployment is predicted to rise by 1.2 million in the next two years.
A recession is not the time for economic rules to be thrown out of the window. It is the very time to keep a firm grip on them, and to do what is right. That means the Chancellor must get a grip of public spending and set the direction for a change of culture towards a fitter and healthier economy.
* Lucy Parsons is Senior Economics Researcher at the free-market liberal think-tank Reform.
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10 Comments
Shock horror Right wing think tank says we shouldn’t tax the rich more. Not sure the stock of organisations like Reform, Adam Smith Institute etc etc is particularly high at the moment and we probably shouldn’t be paying to much head to the likes of them when setting our policies.
I really think it’s a waste of time trying to follow the twists and turns of Lib Dem economic policy.
Only two months ago, Cable was talking about cutting £20bn from public spending, partly to be redirected to other priorities, but with an aspiration to cut overall public spending to allow further tax cuts.
Now, according to that Guardian report, he is calling for “a massive increase in public spending”, to be funded by increased borrowing. I’m not clear from the reports of that briefing whether he’s really supporting £30bn extra borrowing (but if not he ought to sack his PR officer).
This is the man who is supposed to have foreseen this whole crisis months and months ago, remember.
But maybe it’s worth highlighting one detail. Speaking of the “green switch”, the article says “Cable … said his party would spend 1.5% of GDP on tax cuts for the low-paid. About £3bn of this would come from green taxes and the rest from closing tax avoidance opportunities and tax reliefs enjoyed by the wealthy.”
When this policy was announced in July 2007 the costings were reported as follows: “To pay for the £19.2 billion cut in income tax, the party would raise £6.7 billion from higher green levies and £7.5 billion from scrapping tax breaks on pension contributions for high earners.”
http://www.timesonline.co.uk/tol/news/politics/article2067774.ece
If this is correct, it obviously represents a very tangible softening of the party’s commitment to “green” taxation.
You’re wasting your time.
Whatever the question, the liberal party’s answer is, “tax more, spend more”.
The general thrust of this article sounds sensible, but I question this line: “rich people can reduce their ability to pay taxes”
(surely: “rich people can reduce their tax liability”?)
Closing loopholes by simplifying the taxation system not only makes the thing more comprehensible and fairer, but it has the potential (the devil is in the detail) to raise contributions to the exchequer.
I think the correct argument we should be making is ‘tax more fairly, spend more sensibly’.
Art Laffer is a crank.
I can hardly believe that there are still people in the party who think we should deregulate the private sector further given the mess we are in has been caused by excessive deregulation.
There may be specific examples where the case can be fairly made, but to make it as a general point seems absurd.
This article is basically presenting the Tories’ excuse for doing nothing about the crisis. That excuse is, anything you do will only make things worse.
It isn’t true. In fact, it’s a disgraceful abdication of responsibility to face a major crisis and offer to do nothing at all.
It is, however, a reasonable bet that whatever Brown does, things will go on being bad for a good long time. The Tories will then say, Told you so!
Aren’t Tories just wonderful?
It’s not public/private that the main problem, but productive/unproductive investment. The public sector is capable of productive work, if lead well. Compare the Severn Barrage with the ID Cards.
Simon’s arguments are populist c**p. “Helping the poor” is just the lame excuse of politicians who want actually help themselves to increase their control on the taxpayers’ purses and doing whatever they want with the money. The help to the poor never increases in the proportion to theincrease in taxes.
More on Vince’s latest gyrations in the Telegraph:
http://www.telegraph.co.uk/finance/financetopics/budget/3506396/Raise-taxes-on-the-rich-to-pay-for-the-economic-stimulus-package-LibDems-Cable-urges.html
Discussing Cable’s ideas for the funding of tax cuts for “those on lower incomes”, the article says that Cable is “theoretically” in favour not only of “clampdowns on capital gains tax and tax avoidance schemes”, but also of “higher tax rates for the bigger earners”.
A return to the 50p tax rate policy??
And the reason for this volte face?
“I think we are living in a world which has moved further to the left than a year ago, and it’s probably caused by the meltdown in the financial system; by the realisation that people who were being paid extraordinarily high bonuses in the City were not actually wealth creating at all, but were creating a vast pyramid selling scheme that has caused gross financial stability. This was not reward for wealth creation; it was reward for excessive risk-taking and ultimately for failure – and that has fundamentally changed peoples’ attitudes.”