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n his article 'Farewell prudence, hello £2.7bn slush fund', Larry Elliot reflects on Labour's efforts to deal with the criticism of the abolotion of the 10p tax band and the political uproar it has caused. It is a solution that is too late...' The trouble is that it has taken 14 months to find this solution and it came only after the government first insisted there was no problem and then said the poor state of public finances meant only a far less generous package was affordable.' Does it stand as a credible economic policy?The £2.7bn can now be seen as a 'political' move designed to influence the Crewe and Natwich byelection. He compares it to the last time tax giveways were used to try try to gain electoral advantage, Norman Lamont in 1992. He suggests the government's reasons for the change, quoting Alistair Darling "As I made clear at the time of the budget, it is right and sensible to allow borrowing to rise and investment to be maintained as the economy slows. Debt is lower than in the past and low by international standards. Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times generated by the turbulence in world financial markets and global commodity price inflation."
Elliot thinks this is unconvincing, outlining the the two views on fiscal policy: 'One is Keynesian: the idea that when times are tough, governments should do more than simply allow borrowing to rise as a result of falling tax revenues and rising welfare payments; instead they should raise spending or cut taxes to boost activity. The other is called Ricardian equivalence: attempts by governments to borrow their way out of trouble are doomed to failure because individuals know that there is no such thing as a free lunch, with today's tax cut turning into tomorrow's tax increase. As a result, they don't spend the windfall from the state, but save it for the day when they have to pay it back.' The recent $150bn worth of tax rebates in the USA was designed to reinforce the effects of lower interest rates whereas the £120 per taxpayer will have significantly less effect. Read the full article here.
Came across this article in The Times which should be of interest, following the discussion in our Year12 lesson today. The title of the article ' Punish savers and make them spend money' emphasises the author's view that to save will only make the recession worse and with interest rates so low, there is no real incentive to save. 'Instead of reducing taxes on interest payments, (as the Conservatives have proposed) the Government could tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets - or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump. '
