As if Alistair Darling isn't a silly enough name, now the man in charge of the UK's public finances is trying to be Clark Kent aka Superman too. He has made a statement that he is not prepared to let the recession in the UK take its natural course... New Labour to the rescue! Who on earth does he think he is? Does he honestly think he can beat the effects and moves of the international financial system. At best a naive thought, at worst a very damaging one indeed.
November's Pre-Budget speech was launched (officially at least) on Monday 24 Nov. It contained a lot of nothing much as far as many economists were concerned and seemed to go round in circles in many parts. The obvious targeting of a few smoking guns in a rise in income tax for those earning over £150,000 - netting little of the necessary finances that the government are going to need if their plans for boosting the economy are to be realised. Good headlines for middle England. Takes their attention off the 0.5% rise everybody will pay in National Insurance contributions! Realistically, it looks like everyone earning somewhere between £20,000 and £35-40,000 a year or more will be worse off through the package of measures announced in the speech. But the headlines of hitting high earners look good dont' they? I'm not even going to discuss the Manifesto pledge of not raising income taxes that New Labour once promised - they've decided to raise income tax, but not until after the next election, this they maintain is not really technically raising taxes in their government is it? is it? what do they take people for?
VAT down from 17.5% to 15% for 13 months - an ominous choice of term if you're superstitious! More worryingly, not even a bold or educated policy shift. Interestingly, my local landlord simply said last night that this was good as he wouldn't pass the reduction on to his customers, pocketing an extra bit of profit instead. I suspect this is pretty much what almost all businesses will do. Net result: lower tax receipts (of around £12.5bn) + no change in consumer behaviour = own goal Labour. Nice one. Again.
As others are pointing out there really is a more simple solution to help the average person in the street and therefore help everyone in the economy. People do not ponder hard over the rate of VAT and buy more items when it moves a few percentage points downwards (assuming of course that price changes are somehow related to changes in the rate of VAT, see my point about our local landlord above!). Vince Cable of the Liberal Democrats hit the nail on the head with the following statement, "What I fail to see is how the economy gets a major stimulus for, for example, a £5 cut in a £220 imported flat screen television or a 50p cut in a £25 restaurant bill," he said. Here, here.
The key indicator for the average householder's budget is the size of their largest debt payment - their mortgage - and therefore what money they have left over after its payment.
The government in my opinion should be focusing on maintaining pressure on banks to keep interest rate reductions being passed on to those with housing debt problems, thus helping the average person's net income position. Secondly, work with the banking system to ensure liquidity between them and commercial borrowers. If personal borrowing dries up people tend to spend less, a proportion of which is always on imported TVs and the like anyway. When commercial borrowing gets difficult or in this case stops altogether, businesses are more directly affected and jobs are lost much quicker across the economy than when consumer spending starts to wane.
But then, what would I know? I only have a First Class honours degree and a Masters in economics.
Leave it to the former teachers in the New Labour project. We'll be alright. Won't we?
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