Wednesday, November 12, 2008

I've a big respect for Larry Elliott of The Guardian as his analysis explained each week in his columns have been proven absolutely correct. In addition, his Fantasy Island and The Gods that Failed, added more muscle to his analyses. Today he considers Brown's plan to make tax cuts to stimulate growth as economically illiterate.

1. First it is conceptually flawed in its assumption that the way to solve a crisis caused by too much private-sector debt is to boost public-sector debt. Brown seems to believe it is possible to return to the world as it existed before August 2007, in which individuals, financial institutions and governments can live now and pay later, if at all.

2. Second, it is economically illiterate. Brown always argued during his time at the Treasury that it was monetary policy (the level of interest rates and the pound) rather than fiscal policy (tax and spending) that affected economic growth. Now he has apparently decided that unfunded tax cuts can help prevent a deep and prolonged recession. Quite obviously, his grasp of economics was either wrong then or it is wrong now. It is wrong now.

3.Finally, cutting taxes is politically cynical. To make a real difference, Alistair Darling would need to announce tax cuts of at least 1% of GDP in his pre-budget report this month. That would mean a tax-take reduction of £15bn - out of the question given the state of the public finances. The financial markets have been softened up for tax cuts, but they would be surprised and alarmed if the package was worth more than £3bn.

He concludes that these cuts will remain unfunded until the next election after which they will be met either by cuts in spending or higher taxes. He argues that targeted cuts aimed at low earners or small businesses would have been a better strategy funded by more tax for the well-off and the abondonment of unnecessary expenditure like Trident. Seems like another ctitique which is spot-on to me.

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