Monday, 2 November 2009

It's NOT about spending, stupid !!

The economy remains fragile while the debate about the economy has become febrile - a bit trite, perhaps, but true. Those attacking Gordon Brown and Alastair Darling's management of the economy usually start their attack with public spending and public debt.

However, this is a complex subject and the simplicity of the debate and the arguments used by many Conservative bloggers and supporters simply don't stand up when you start looking at the facts.

Last Friday, preliminary (and it's important to note that) figures showed GDP in Britain to have fallen by 0.4% in the third quarter of 2009. This stood in stark comparison to the US which in the same period showed growth of 3.5%. These figures were used by critics as a stick to beat the Government though it's quite possible both figures will be revised in the next few weeks.

The Conservatives have used the argument that the public debt is out of control, fuelled by excessive Government spending and the first task of the next Conservative Government will be to attack Government spending. Thus, the argument is focussed around spending cuts and the anti-Labour press is preparing the way by putting forward the argument that the public sector is riddled with waste and deserves to be taken down a notch or six.

The fact that thousands of public sector jobs have already been lost cuts no ice - the Tories are in a vengeful mood. They see public sector workers as an anti-Tory bloc needing to be destroyed or at least reduced.

The truth, of course, is very different...

I am indebted to Allister Heath, editor of City AM for these statistical gems which provide some valuable context. In the period April-September Government spending rose by 6.9% (compared with a forecast increase of 8.4%) while current spending is rising by 4.8% (well down on the 7.4% expected in the Budget). In fact, Government spending is running at about the same level of increase as it has done for the past few years so the notion that the Government has increased spending during the recession is just plain wrong.

The problem lies on the other side of the balance sheet - an area rarely talked about by the Conservative blogsphere and Tory activists. Central Government revenues (the money Government gets in from taxes) has collapsed by 10.3% in the period April-September (Darling forecast a 7.8% slump in the Budget). This has occurred despite a couple of more positive developments for public finances - the stock market recovery since the nadir of early March has brought in about £3bn from stamp duty and capital gains tax while the rise in the oil price has also brought in around £3bn in tax to the Exchequer.

Thus, the argument that the Government has deliberately instigated a stimulus to keep Britain out of a deeper recession or even depression is simply untrue. What we have instead is a budget deficit spiralling out of control NOT as a result of increased spending but falling tax receipts.

If we don't understand the problem, how can we define the correct solution ? The Conservative predilection for spending cuts misses the point completely and runs the risk of creating more problems. IF thousands of public sector workers are thrown out of jobs as a result of Osborne's ideas the impacts will be two-fold - first, general economic activity will be reduced and second tax receipts will fall (these people won't be earning and won't be paying tax) while at the same time the demand on public money to pay welfare and unemployment will increase.

In short, a policy predicated purely on cutting spending is at best ineffective and at worst likely to be counter-productive.

If the priority is to rebalance the books and reduce public debt, then there is obviously the scope for some cuts but there must be an equal priority to getting tax receipts flowing again. That might mean perversely NOT raising taxes but cutting them but in a targetted fashion. Taxes need to be reduced on business to encourage companies to invest in people and take on more workers who will in turn pay taxes and reduce the calls on welfare.

A sensible economic policy for the post-recession years must therefore be multi-faceted and I would propose this:

1) Limited spending cuts - the fat not the meat - based on a rolling 5-year programme of reduced spending and efficiency savings minimising job losses.

2) Tax cuts for business - reductions in corporation tax, stamp duty and possibly capital gains tax to stimulate economic activity and get companies hiring again.

3) Incentives for savers and borrowers - give people an incentive to save eg: reward those who overpay their mortgages or pay them off early.

4) Tax increases - levels of personal taxation may have to rise - returning to say a 25p in the pound and 20% VAT rate won't be ruinous though it will be painful but the revenue generated will help claw back the deficit.

In the end, only a sustained period of economic growth will help restore the public finances. The priority should be to put policies in place to achieve that rather than simply working off an ill-conceived prejudice against a key sector of the economy.

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