Afternoon:
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A GENERATION ago, one of Margaret Thatcher's Chancellors of the Exchequer was ridiculed as a "one club golfer" by the Labour opposition when he relied solely on interest rates to manage the economy. The belief then was that interest rates alone were not the right tool for every occasion. Sometimes they were simply not powerful enough, perhaps they took too long to have an impact, and at other times they are not passed on.
So in really threatening conditions governments also have to be prepared to cut taxes and raise spending because these moves put money directly and speedily into people's pockets in a way interest reductions rarely do. Government should do this without worrying too much about the effect on its overall finances, on the basis that if it did nothing the economic slump would cost far more than any tax cuts.
Such fiscal measures went out of fashion in the good years, when economic management was relatively simple, but is now back on the agenda with a vengeance. One of Britain's leading independent economists, Doug McWilliams of the Centre of Economic and Business Research, published a paper over the weekend saying that VAT should be cut immediately from 17.5 per cent to 12.5 per cent as a way of easing the burden on consumers and reviving the economy - at a cost incidentally of £24 billion. These things don't come cheap.
At the same time the Society of Motor Manufacturers, reeling from car sales which have collapsed by a quarter, called for the scrapping of motoring-related tax increases due to come in next April. The Tories meanwhile have been arguing strongly for tax cuts as an alternative to increased or accelerated government spending.
There is more chance than normal that such demands will be listened too because any day now Alistair Darling will have to publish his pre-Budget report, a Parliamentary set piece which is the perfect platform for any such changes. Hence too the hint by Gordon Brown this morning that there will be announcements "very soon". Gossip is that the package could be £10 billion or more.
Mr Darling has already promised to bring forward government spending but, with the realisation that this is difficult to do, the demand for tax cuts has grown. Projects big enough to make a difference require long and detailed planning - it would be inconceivable for example to accelerate work on the Olympics or Crossrail. Tax cuts require no such planning - other than decisions on who should benefit most.
This matters because to help the economy the money needs to be spent rather than saved, so that it boosts demand and creates jobs rather than sitting idly in a bank account. We don't know what form the tax cuts will take, but when they come expect them to target the lower paid. Not only are they usually Labour supporters but they are also more likely to spend it all.
Reader views (1)
"....expect them to target the lower paid. Not only are they usually Labour supporters but they are alsomore likely to spend it all".
And how patronising is that. Did it not occur to you that the lower paid, many of whom are pensioners, are likely to need it most. Unlike the higher paid, who are usually Conservative supporters and are also more likely to save it, because they don't need it.
- Val Daniels, Mijas Costa. Spain
