Monday, 5 January 2009

The dangers of Cameron's latest wheeze

On the radio this morning, David Cameron sounded ever more preposterous in his faux-shock at the Prime Minister's borrowing strategy and the decision to spend £12 billion on a 2.5% cut in VAT. No term of abuse was too strong for this idea, despite its being first proposed by one Kenneth Clarke, because of its impact on public debt (though significantly, Cameron admitted he wasn't suggesting much lower debt levels himself).

By lunchtime, we saw where Cameron was headed. He had his own tax cut plans - worth £4 billion a year with no indication from whence they might be funded, though health, schools, defence and international development budgets would be left unaltered. Tax-free income would rise £2000 a year for the average pensioner and basic rate taxpayers would pay no tax on savings.

But what would the economic impact of this unfunded largesse be? As the respected Institute for Fiscal Studies pointed out, there was a chance that it would result in less money flowing into the economy. Moreover, once the four ringfenced areas were left unscathed it could result in a "very sharp slowdown" in the rate of spending growth across many areas of government.

Which might, incidentally, also lead to higher council taxes, as DCLG is not protected. Back to the drawing board, chaps?


Labourboy said...

So if the Tories have promised to cap Council Tax for people, then that too is essentially ringfenced isn't it?

So it's another area where they have committed money - so where will the axe fall? Which departments? Culture? Do they even get £5bn!

Anonymous said...

You're trying to have your argument both ways here. Either of the following is true, or a bit of each, but not both together:

(1) The tax cut is "unfunded largesse" - implying that it will be borrowed cash. In that sense, it will borrow £4bn to put into people's pockets. Even if the IFS is right that there's a very low multiplier (and the evidence here is mixed - remember those with big basic-rate savings are pensioners who DO spend), say 0.5, it would add £2bn to domestic demand.

(2) As was actually stated, £4bn will be found in savings outside of health, schools, defence and international development to finance the cut. In that case, we have the "very sharp slowdown" in other areas. Note, a "very sharp slowdown", not a cut. And in fact, Darling's Budget already rely on a plan to find £5bn in savings, doubtless having the same effect.

So, it's either "unfunded largesse" or a "very sharp slowdown" in government spending, but it's obviously not both.