Archive for the ‘government borrowing’ Tag

What a missed opportunity

Oh dear oh dear.

The Chancellor of the Exchequer has presented his mini-budget, PBR, Autumn Statement or whatever you like to call it. It’s a proper mishmash of things, and while his intentions are right, what he’s done won’t work. Probably. I hope it does, but I really don’t think it will.

The headline change is the cut in VAT to 15%. This is supposed to get us out spending again, but as many people have already commented, its effect will be marginal – except on the government’s finances.

The aim of any Chancellor, doing this stuff, is to get the biggest bang for the buck. What  tax changes will change the way people behave, yet result in the smallest loss to the Treasury? Well, a 2.5% cut in VAT will have almost no effect on the way people behave, yet will result in a considerable loss to the Treasury.

The cost of the change is more than £11bn. That’s how much less VAT the government will collect next year. But will a 2.5% change in the ticket price affect your decision to buy a new frock, a drink, a holiday, a kitchen appliance or a theatre ticket? If you are facing the prospect of unemployment, or are unemployed? You’ll hardly notice it. For small items, the change is pence, hardly worth retailers’ time to change. For large items, it still pales into insignificance compared to the practice of commercial discounting. A totally fruitless exercise, costing the taxpayer £11 billion which will have to be repaid sometime later.

The other thing that the Chancellor has done is to bring forward £3bn of capital expenditure to FY 2009/10 from FY 2010/11.  This is, generally speaking, a good thing. Capital expenditure by the government creates jobs in sectors such as construction which have been badly hit by the property downturn.

It would have been far better to keep VAT at its current level, and invest £11bn in the nation’s infrastructure. Properly funding a programme of home insulation grants, not for 60,000 households, but for 600,000, for example.  Or  kickstarting an offshore wind development, which could be privatised as soon as the capital markets recover – making, no doubt, a tidy profit for the state at the same time.

But a pointless cut in VAT generates more headlines, and has no doubt been calculated to produce more poll points than anything else.

We despair.

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tory dunces

I am astonished at how badly the Tory party is playing the current crisis. In the UK, we need a competent opposition, but all their pronouncements on the economy are just plain wrong. This morning, on the Today programme, their shadow Chief Secretary to the Treasury, Phil Hammond, no doubt fielded because George Osborne is already totally discredited, spouted more of the same rubbish. The Tory case is Yes to boost the economy, but only on a funded basis,  because we are over-borrowed.

But the case is overwhelming for more government borrowing now. Too bad that the Government has already borrowed too much; that’s in the past. It will make today’s essential borrowing more difficult, and more expensive, but it doesn’t make it any less essential. Tory policies will lead to a longer, more painful recession. The funded-expenditure argument is as ridiculous now as  was the 1920’s insistence on sticking to the Gold Standard.

More borrowing now, to be used for tax cuts and public works expenditure – specifically aimed at solving energy problems, e.g by insulating homes, building high-speed rail links and zero-carbon power stations, installing smart electricity meters nationwide – will tend to push up interest rates, which will encourage people who have money to save it, and those who don’t to borrow less. This is a good thing.

It will also create inflationary pressure. A little inflation is a good thing, particularly when asset prices are low. It encourages people to put their money into title-denominated assets like shares and property, and will therefore get the housing market and the stock market moving upwards in nominal terms. At least it gets them moving.

The economic case is almost identical on both sides of the Atlantic. The lame-duck presidency can’t do very much, but the new regime will have to embark on the same sort of programme against the same sort of economic background.  Expect a massive rise in the already-massive Federal deficit; the difference between the US and the UK being that the current US deficit is because of  the Cheney cabal’s larceny,  whereas the current UK deficit has been used to bring long-overdue improvements to the nation’s schools and hospitals which were so damaged by eighteen years of malign neglect under the previous Tory administration.

The fact that the world is all in the same mess does mitigate at least one risk factor associated with the huge borrowing the UK government is going to have to undertake: a run on the pound. Everyone else is going to have to do the same. There will be US inflation and there will be Eurozone inflation; and this inflation will help us all out of the debt mire.

My prescription is pure Keynesianism. I suspect that the Tory problem is that they believe that Keynesianism was wholly discredited by Friedmanite Thatcherism. They are wrong; it is a matter of horses for courses. The misapplication of Keynesian policies in the 1960s led to 1970s stagflation, which required a good dose of Friedmanite Thatcherism to correct. The problem we now face is much more like the problems of the 1920s than the 1970s, and it needs a Keynesian solution.