Monday, November 10, 2008

Tax: Labour to copy the Lib Dems; Tories to lose the plot

We hear that Gordon Brown (not Alasdair Darling - what is his job, again?) is thinking about tax cuts as part of a fiscal stimulus package. This is something that the Lib Dems have been advocating for some time, particularly that taxes on people on lower and middle incomes are particularly good candidates for lowering to stimulate the economy. Such people are most likely to spend the extra money, and, if they are homeowners, to keep their homes as a result. This sort of stimulus also has the advantage over extra public spending in that it benefits the private sector directly, not just indirectly. More from Nick Clegg and myself on this here.

Some will doubtless feel offended at Labour stealing our policies, but I rather like it. They are admitting to the world that we were right all along, again, and that if you want the right policies on the economy without months or years of dithering first, then vote Lib Dem.

The Tories on the other hand, well, what can I say. 

The Tories unveil their own plans, aimed at dealing specifically with unemployment, on Tuesday.

They say they would fund tax cuts through existing spending and not - as they suspect the government would do - through borrowing. 

The Today programme was suggesting this means tax cuts targetted at people "likely to lose their jobs." Huh? What? How can you measure who is likely to lose their jobs, in a systematic enough way to include this concept in tax law? Or perhaps they just mean tax cuts for bankers. That could be it. But incorporating this kind of nebulous concept in tax law is even worse, and will lead to far more pointless complication of the tax system, than even Gordon Brown's insufferable tinkering. Whatever happened to a simpler tax system?

Bizarre as this is however, it is not the worst of it. They would fund these cuts "through existing spending" [cuts], not through borrowing. So this is not going to be a fiscal stimulus at all. The Tory response to the economic climate is to do nothing. Whoopee.

8 comments:

Tristan said...

Tax cuts for George Osbourne?

Darrell G said...

Well, I agree the Tories are all at sea this time....

I think, as I say over on my blog, this raises the question of where the benefit to us is in the polls or prehaps more precisely why there is none...

Anonymous said...

I can tell you we are NOT gaining ANYTHING politically from this.

Gordon is seen `as doing a good job` despite the fact that the British bubbles were an awful indictment of British economic policy.

The tories are seen as `not Labour` while we are sidelined.

Joe Otten said...

Tristan,

Of course Osbourne has long been saying that the cupboard is bare, so this would be a reverse. The speculation on the today programme was around something like spending future savings today, which does kinda suggest borrowing - the whole fiscal neutrality across the cycle idea implies that all deficit spending in a recession is based on future revenues/savings already, so I don't see how you can have any more without double counting something.

Darrell/Anon

How can you tell what the contribution is to our poll rating from each specific issue? Call me naive, but I prefer to focus on the merits of the issue.

Alex S said...

To recap, we're planning to fund a tax cut for some people (low and middle earners) with a tax rise on other people ('the wealthy'). This is not a fiscal stimulus in the classic Keynesian sense of a deficit-financed boost to demand; instead it is revenue-neutral.

The reason given for this is that we don't want to add to the already large underlying structural budget deficit, which is soon to be augmented by collapsing tax receipts and increased unemployment benefit costs.

Borrowing is going to increase dramatically as the 'automatic stabilisers' kick in, and we should allow these to operate so as to cushion the recession - but we should not store up even bigger fiscal problems for the future by further discretionary increases in borrowing.

This strikes me as sensible. But on the face of it, it seems hard to reconcile with claims that we are offering a big fiscal stimulus - since, as I said, our plans are revenue-neutral and redistribute rather than lower the tax burden.

The explanation is that economic theory and empirical observation suggest that low and middle earners spend a greater proportion of their income than the better off, and are therefore more likely to ensure tax cuts translate into higher private spending rather than higher private saving.

That's probably a safe bet, although behaviour during volatile economic times is notoriously hard to predict (the high inflation of the 1970s, for example, perversely led to an increase in saving).

The implication is that tax cuts aimed at the less well off is a potentially effective recession-fighting tool. It would be more effective as a stimulus, presumably, if the revenue was not being clawed back from the better off, since rich people spend (a lot) as well as save - and if we had stronger public finances it may well have made sense to let borrowing take the strain.

One snag with our proposal is that it assumes that we can get as much revenue from the better off as we assumed when we first formulated this policy more than a year ago. But tax revenues from things like CGT are surely going to nosedive.

It seems responsible and funded, yet rests on the populist assumption that the rich are there to be fleeced if only politicians would have the guts to do it.

While there are indeed injustices in the tax system that need rectifying, I simply don't believe the wealthy are - or should be - an endlessly bountiful source of revenue.

Joe Otten said...

Alex,

Looking at today's pronouncements, you may be right. However I think we are suggesting a looser fiscal line than the conservatives at the moment - see for example my previous post on this blog.

Although the conservatives may be about to loosen too if they go ahead with borrowing against notional future savings in unemployment benefit.

Part of the problem with debating this clearly is that there are a lot of ingredients in the pie:
-The Green tax switch proposals
-The £20bn savings for spending and further tax cuts
-The "automatic stabilisers"
-Any other fiscal measures

If all this happens, plus some capital project, does the capital project money come from borrowing or does that come from revenue and the tax cut from borrowing. The distinction can be somewhat artificial.

Add to this the differences between policies right for now and those right for 18 months hence.

Darrell G said...

Joe,

The simple answer is that our poll ratings are not going up which you would expect them to be if we were indeed seen as 'leading the way'...also we now have Glenrothes by-election result to go on which wasnt good and confirmed the general trend of the polls...ie, we are losing ground to Labour...

To be honest my observation was as much a question...

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