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Reply #54: UK Stimulus: "Bold, imaginative and it might just work " (Guardian) [View All]

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Ghost Dog Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Nov-25-08 10:13 AM
Response to Reply #52
* Will Hutton

This was an almost great economic statement rising to the seriousness of the situation with boldness and sometimes real imagination. It is a stimulus to the economy in a full year of 20bn, which has been organised to come through in 2009/10 when it is most needed. The centrepiece is a temporary 8.6bn reduction in VAT to 15%. In the 1950s, governments used changes in the then so-called purchase tax on goods and services to regulate spending, and the "Regulator" was a fast and effective means of increasing or decreasing demand.

Although tax credits to the low paid had powerful attractions as a way of stimulating demand, the chancellor has chosen to go no further than making the big 600 increase in personal allowances permanent, while adding another 130. The American example is that in current conditions taxpayers tend to save any income tax giveaways. Hence the cut in VAT to make spending more attractive. I suspect it might work rather better than received opinion thinks, which together with bringing forward 3bn of capital spending into 2009 credibly adds 1% to demand at the moment it is most needed. He is to be congratulated.

But the PBR is only almost great, because the chancellor could have done more to mitigate the inevitable risks and hazards. He has chosen to wait until next spring to introduce measures to restore the flows of mortgage finance far too late and he has been far too minimalist in measures to get bank lending going. As it is his economic forecast for 2009 is at the optimistic end of expectations, relying on the effectiveness of his intervention. But if the economy does not respond to his measures as well as he hopes he will find borrowing exceeding his already high forecast of 118bn in 2009/10. As bank lending is at the root of the crisis, I would like to have seen him extend the approach he has taken to small business guaranteeing loans and working capital through an insurance scheme more widely deployed.

Those reservations aside, there is much to admire. The rapid response initiative to help people newly unemployed is imaginative; so is the Employment Partnership to make sure that the vacancies that do exist are as quickly filled as possible. It was also vital that he deliver a credible plan to reduce the deficit beyond the peak, and the proposed increase in the top rate of tax and national insurance contributions do that. However, there is 5bn of so-called efficiency savings pencilled in from public spending, and when the markets look at this more closely in the days ahead this will be an area they question. Yet if the plans work he will have slowed down public spending growth, protected capital spending, got back to a balanced budget in 2016 and created a fairer tax system. And if the efficiency savings don't transpire he can always increase VAT, which is much easier than increasing income tax.


Just like the 70s - without a 3-day week

* Larry Elliott, economics editor

There's no three-day week and the lights have yet to go out. But in every other way yesterday's pre-budget report (PBR) was a throwback to the 1970s. For a start, we had a chancellor admitting that the country was in an awful - but unexpected - jam. What's more, we had a good old-fashioned remedy for the crisis, oodles more public borrowing to finance a VAT holiday, accelerated public spending and a package of help for small businesses.

Finally, there was a vague echo of old Labour class-war rhetoric, with the commitment to raise the top rate of tax to 45% on those earning more than 150,000. This is less of a risk than it once would have been for the government. Ministers sense, almost certainly correctly, that the public blames City fat cats earning more than 150K a year for the country's current predicament and want them to suffer financially for their reckless speculation.

In truth, Alistair Darling could probably have put it up to 50% without much resistance from a chastened City.

But if the decision to abandon the commitment not to raise the top rate of tax - one of the bedrock beliefs of New Labour - was no gamble, the rest of the PBR most certainly was.

The prime minister and his chancellor are betting the farm on the 2.5 percentage point cut in VAT prompting a splurge in spending that will limit both the depth and the duration of a recession neither of them saw coming.


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