Boosting the economy: lower taxes, higher spending or both?

November 12, 2008

Prime Minister Gordon Brown has suggested he will push expansionary fiscal policies to help boost the economy. Brown’s comments were the latest in a series from him and Chancellor Alistair Darling stressing the importance of boosting the economy, which shrank in the third quarter of 2008 for the first time in 16 years and is expected to contract more sharply next year.

Bank of England Governor Mervyn King has also put his weight behind “some fiscal stimulus”, just as the Bank predicted in its quarterly inflation report that the economy would shrink sharply next year.

But what is the way forward – tax cuts or higher public spending?

The dividing line between Brown and Tory leader David Cameron is whether to borrow to fund tax cuts. Cameron has argued that Britain’s deficit is too high to allow further borrowing. Brown says Cameron’s claim that he can pay for his tax cut by savings on welfare benefits isn’t realistic.

Tax cutting is a populist measure and it may be tempting for Brown, who no longer appears to be married to fiscal prudence, to go down that road, not least because of the backlash he faced earlier this year over scrapping the 10 percent tax band.

But there are a number of reasons why tax cutting may not result in a boost to the economy: government borrowing gets dangerously high and will limit the economy’s ability to recover swiftly from a recession, and people may decide to save rather than spend any extra money they might have in their pocket due to tax cuts.

What’s your view – do you think increased public spending will stoke demand, are tax cuts the way forward to boost the economy or should the government go for a mix of both?

14 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

General mix always is the best bet.
Only productive Investment should be proceeded with such as Cross rail (advanced), airport and port improvements.railand transport links etc.
Tax cuts should major on VAT as this will encourage spending.
I am very concerned we do not understand the balance in Housing between supply and demand and I am not convinced we need significant housing developement over the short to medium term. Im provements are what is required not necessarily major greenfield initiatives.

Posted by stanley | Report as abusive

The demographic currently taxed is at breaking point – and further increasing this burden will only result in exacerbating the inevitable economic depression we face.

If we, as a nation, borrow in the short term, without a strategy to pay down this debt, we risk national ruin as the state follows the path of subprime borrowers whose consumption is funded by debt. No future lies here – for anyone.

The only way to resolve this is to accept the deflating asset prices and force bankruptcy on those who this leaves insolvent. This would not be a disaster – at least not compared with a corrupt government propping up the interests of a politically selected demographic. Now is the time for governments to accept the verdict of the markets. We’ve experienced an economically crippling bubble – we must let it burst if we’re to collectively survive.

Posted by Steve | Report as abusive

Great!
Unlimited borrowing got us into this mess and now Gordon Brown wants to borrow to get us out of it. It’s high time that the public and governments abandon the goal of constant economic growth. It is unfeasible to rely on global expansion forever. Sooner or later economies will have to stabilise and not rely on continuous growth. The planet cannot support this kind of growth and it is not desirable for societies either. Governments have found billions of pounds to bail out financial institutions and yet they cannot find the £50 billion that the G8 promised to end global poverty. Surely, the money would have been better spent on stablising the global economy on a partisan basis rather than propping up the false economic situation of moving electronic sums of money that only exists in the ether. We were given a golden opportunity by the credit crunch to reshape our global economy and we are throwing it away by clinging desperately onto “business as usual”. Once again, the bankers and special interest groups will benefit and the rest of the world will pay the price.

Posted by James | Report as abusive

There is a solution to the governments dilema over balancing revenue and expenditure that the taxpayer would be perfectly happy with.

We have @ 1million Eastern Europeans working in this country.
We have 1 million plus British people on incapacity benefit i.e. enhanced unemployment benefit for people who don’t want to work (genuinely ill and incapacitated people excepted).

1) Send the Eastern Europeans home (this deals with overcrowding of hospitals, schools etc)

2) Make those on incapacity do the jobs the East Europeans had. Refuse to pay benefits if they pretend that they can’t [learn to]do the job.

Welfare payments would drop by several billion, the government would preserve its tax receipts and social services would be less cash stretched as a result of a lower overall UK headcount.

Lets not sit on the fence anymore. It is too expensive and too many people put nothing in to the system but get plenty back out.

Posted by nick | Report as abusive

Borrowing from ourselves is no big deal. For years, conservatives have argued pointlessly against having a deficit. They have used it in their policies as an excuse to slash from public programs, ignoring the fact that it’s money owed to ourselves that helps keep the engines of capitalism turning over.

Posted by June | Report as abusive

Please no more Government spending – they must reduce (cut) their expenditure on non capital items now and live within our means.
Look after British workers by all means and at the same time reduce the costs of welfare by encouraging (requiring) the workshy to contribute.

Posted by Alan | Report as abusive

I agree with James. The Western world (in particular) got into this mess by living way beyond its means, spending money it didn’t have and which it couldn’t afford to pay back, and what is the cunning plan that our great leaders come up with to get us out of it? Well, of course, it’s to live way beyond our means, spend money we haven’t got and which we can’t afford to pay back. Brilliant! Why didn’t I think of that?

Posted by Matthew | Report as abusive

If savers outnumber borrowers by 6:1 ( as has been quoted) then cutting interest rates hits the very people who are in a position to help the economy grow in the short term. It is well known in marketing circles that the real spending power lies with the older generation and these are the very people who are likely to reign in their spending if rates are cut further. The folk who live on credit ( usually the younger consumer ) are going to have to get used to living within their means and banks are right to be cautious in lending to such people. We cannot build an economy on the basis of asset inflation and the ‘never never’!

Posted by paul | Report as abusive

The sad reality is that politics and power come first.
While a left wing government is in power, they will not make their core voters suffer. Because Labour’s core voters are not the self-sacrificing type, the UK will suffer from more borrowing and short-sighed policies.
Labour loves to borrow because they know when they’re finally voted out (if Brown can suffer an election the UK never had) the Conservatives will have to clean up the mess. It’s the seesaw mentality that is the curse of democracies; there’s usually two sides, Left and Right, cleaning up after one another’s respective deficiencies.
I moved from the UK three months ago and am enjoying watching the news: I laugh every time the UK slides into a media manifested recession/depression, prompting an ‘apocalyptic’ return to Thatcherism scenario – because that’s the logical conclusion to this credit crunch. And where’s Blair’s Joker-Smile to assure everyone that “borrowing is the right thing to do?”

The strength of a country’s economy is usually judged by the strength of its currency. Like Simon I also moved abroad but forgot how appalingly weak the underlying UK economy is and to change all my pounds into a strong currency. So whilst everyone at home is going broke, so too are ex-pats because of the huge depreciation of sterling, even against currencies like the Thai baht (26 pct in 2 years). Long after Brown’s and Darling’s names are history, the UK economy will be dragged down by massive govt debt that these two incurred and with interest rates by then on the way back up it will just make matters worse. Recession will be with the UK long afer countries like America are well on their way to recovery.

What’s my view?

My view is that the answer to the question is so obvious that Reuters should not be posing such a stupid question.

Trying to give a veneer of legitimacy to Bottler and Badger’s destructive policies, perhaps?

Posted by Andy | Report as abusive

As in the US, the UK needs an election to provide some hope of change. The Tories do not impress with the lack of clarity on their policies, but at least they are not deliberately destructive like the Socialists and will do what is right to get the country up and running again.

The proposed Tory policy of reducing VAT to encourage spending is correct. Their proposed policy of reducing Employers’ NICs linked to the re-employment of long-term unemployed is muddle-headed, as no employer of sound mind is going to be increasing headcount until an economic recovery is well under way. The Tories should be reducing the overall burden of Employers’ NICs in order to help employers to retain their current staff in work.

The blog suffers from the usual Reuters cant to the Left.
The idea that Brown was ever “married to fiscal prudence” is a sick joke. Did we arrive in the current situation with massive debts and an empty piggy bank by accident? I think not.

Posted by Jason | Report as abusive

The Prime Minister and his advisors are akin to the family overdrawn and out of cash who decide the best option is to take out yet another mortgage on their house only to discover that the repayments also cannot be met and end up losing the house.

Posted by terry coates | Report as abusive

It is obvious when times are tough common sense says stop extra spending and live in your means. Or if you have not enough money coming in find out ways of earning money or work hard. But unfortunately Britain has lost those opportunities.
Way Forward:-

1. There are no jobs so Government have to generate more job opportunities. The only way how we can do it. By bringing our Manufacturing Back in Briton and people who are on welfare its government job to make sure they get work. And welfare money should be used in right direction.
2. Secondly and most importantly Home office need to play vital role as well. E.g they are still giving Higher skilled Visas and work permits to people. Government is aware that there are no jobs. 3 million people are job less half of them who are highly qualified in Briton are not getting anywhere but still home office are giving them visas. Also Eastern European they are coming here claming benefits and working here.
All I am making a point here its Government who should be accountable for this also the people who don’t want to work and government have to let Eastern European people to do the job to cover the labour Market. If immigrants can leave their homes and come here to work and make their lives better why cant British People do the same for their own country and make country Proud.

I think working hard is the way forward. But Government need to generate jobs. Banks need to be responsible while they are lending.

Posted by Zac | Report as abusive