Monday, November 10, 2008

If Only They Had A Strategy


George could end up looking like this

Yes, they're 13% ahead in the polls, but Dave and George are currently digging themselves into a right old hole over tax cuts. Having slammed Gordo for maxing the credit card, they're desperately scratching round trying to find some way of cutting taxes without borrowing more. And on the brink of a ginormous recession, it will be fascinating to see what they come up with.

Of course, there is a way of cutting taxes without borrowing more, and it's long been advocated by BOM. It's called cutting government spending.

But with the economy plummeting by the day, now is not the time to cut any spending. Cuts necessarily depress demand in the economy, and would make the hole even deeper.

So why would the Tories propose it?

According to Doc Fox, "most people will think to keep spending now and pass the debt onto the next generation is not a responsible thing to do."

Well, yes, quite. But in a slump, will "most people" think about their responsibilities to the next generation? We reckon that with their jobs shredded and their homes repossessed, most voting punters will say stuff the next generation - we'll all be dead by then anyway - FFS don't make our pain even worse now.

Dave, George and the Doc might care to reflect on the tortured life of Philip Snowden, Chancellor of the Exchequer in 1931 (pic above). Snowden was a strict Christian Socialist who believed all borrowing was intrinsically evil, and therefore tried to balance the government books by slashing spending right at the onset of the Depression. Bad call. Among other things, the Navy mutinied when he tried to cut their wages, sterling got nuked, and his party got anihilated in the crisis election (Labour lost 80% of its seats).

Now, clearly Dave et al don't actually believe in stuff like Snowden did - they're modern politicos after all - but despite that they have still managed to dig themselves into an almighty hole. By spending the last three years so adamantly denying the scope for unfunded tax cuts, they now find themselves in the ridiculous position of being the only party not able to offer them*.

In a slump, the case for cutting taxes is stronger than ever. Not only will cuts start to repair the damage to enterprise and effort inflicted by a decade of Labour, but properly targeted they should help cushion the fall in demand and employment. There are benefits on both the supply and demand side.

The real reason for hesitating over unfunded tax cuts is not the burden on future generations - serious though that is. It is that too much government borrowing could easily shatter confidence in the financial markets. It could easily see the bond markets ramp up borrowing costs, and the currency markets pull the plug on sterling (cf the 70s, and see previous blogs).

Which brings us back to those fiscal rules.

As regular readers will know, we were appalled at George's Conference speech when he dumped the fiscal rules altogether (see here and here). We believe that he should have extended Brown's rules to incorporate the vital Third Rule - the one that limits the growth of public spending (see previous blogs).

And let's remind ourselves precisely why we need such rules, publicly stated and independently monitored: it's because they commit the politicians upfront to a strategy for maintaining fiscal discipline over the medium and long-term. And in circumstances like today, they provide reassurance that borrowing to combat recession will be clawed back when the economy recovers. Bitter experience tells us that "trust me" is never enough.

That's not just how we feel - it's also how the financial markets feel. And as the government's borrowing next year soars through £100bn pa, the markets are likely to remind us just how difficult they can be once fiscal trust is lost.

Given the complete hash Labour have made with their rules, the Tories have a great opportunity to grab the ground as their own. A clear strategy for permitting unfunded tax cuts now, coupled with stated targets for cutting public spending over the medium term (as a percentage of GDP).

How much more convincing than vague promises of yet another Gershon-style waste programme (they never work), or some sleight of hand involving temporary deficits in the National Insurance Fund.

*Footnote - the Lib Dems claim their tax cuts "for the many" would be paid for by tax rises for the few. But given their sums don't add up, in reality they're offering unfunded tax cuts just like Labour.

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