A lifeline or a time bomb?

November 24, 2008

Chancellor Alistair Darling has delivered a 20 billion pound fiscal stimulus package to get the nation spending again and mitigate the worst effects of the downturn.

He cut VAT to 15 from 17.5 percent just in time for Christmas shopping – a move he said would put some 12.5 billion pounds in consumers’ pockets over 13 months. Other measures include well-leaked plans to help homeowners, small businesses, parents and pensioners.

But government borrowing will more than double to 78 billion pounds this year and 118 billion next year before starting to come down. Darling says he will bring the public finances back into balance by 2015.

The package now sets in stone the diverging approaches towards the downturn being adopted by the main two parties. Labour is effectively spending its way out of recession, the Conservatives — against the run of most independent economic advice — have opted for caution. Shadow Chancellor George Osborne said the plans amounted to “putting a time bomb,” set to explode in the future, under the nation’s finances.

What do you think? Is this a bold and innovative way to get the economy moving again or a dangerous, debt-fuelled gamble?

17 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/

I think it is possibly a time bomb. What would happen if the economy does not recover soon enough, I mean what would happen if the world economy and British economy in particular takes 10 years to come out of recession like the Japanese economy did during late 80s, from banks are we going to see Government going completly out of business, what than.

Posted by Lec Neli | Report as abusive

A huge opportunity missed, for the country and for Gordon’s chances in the next election.
2.5% off VAT means absolutely nothing to the consumer, will cost the IR a packet and will have no effect whatsoever on consumer spending.
Some SMEs will benefit from the tinkering re allocation of losses and empty properties, some will save a packet, but too few to make any real difference.
…and those facing the prospect of repossession gain a few weeks of further misery before they’re turfed out?

Sadly, the majority of small business owners, the ‘man in the street’,your average ‘working Joe’, and those struggling to make ends meet are left bewildered and disappointed.

Posted by Alan Elworthy | Report as abusive

Whatever happened to the much-vaunted “steady as she goes” approach? All this does is signal loud and clear how desperate the Government has become. Make no mistake, this whole crisis is ultimately a debt crisis, and we think we can solve it by taking on more unsustainable debt! The only good thing about this sorry situation is that when the EU comes down on us like a ton of bricks for breaking the fiscal rules, the backlash might just give this country enough backbone to get out of it once and for all. A sizeable chunk of the country’s debt could be paid off every year with the money wasted on that ludicrous gravy-train.

Posted by Matthew | Report as abusive

This is a gamble, no doubt about it; but the other options are equally unattractive. Aside from the measures that have already been taken (at great cost) to stabalise the banking sector in the hope that credit will loosen, there is little more that can be done than to try to prevent individuals’ purse strings tightening. Demand is critical. Without demand, measures that target companies, for example tax breaks for recruitment are pointless – no commercial enterprise worth its salt hires in the absence of demand. That would be crazy. The only other option is to ‘sit it out and take what’s coming’. Don’t expect the electorate to warm to that option; we expect politicians to say they will fix it, not that they will sit and watch.

Posted by Catherine Hewitt | Report as abusive

whanever you go up you have to go down, sooner or later everyone sould expect it, only the stupid one think otherwise. The only way out, is to change everything. Start with the free for all credit, greed build greed and in the and disaster will happen. We havn’t see the fall blow, waite and you will see the up, started slow so do the fall.

the truth is he,s done very little.
local chappy who charges vat will not bother taking it off….and then its only £2 in a hundred-WOW, thats going to make me rush out and spend–oops better not-the FUEL!

I believe the Government are right in attempting to prevent recession becoming depression. The Tories plan to pay businesses an incentive to hire staff misses the point completely. We need to prevent as many redundancies as possibe in the first place. The recessions of the 80/90s hit families hard. Remember colossal lending rates, poll tax and the cuts in child benefit. A 1/2 % rise in National Insurance is nothing compared to that.

Posted by Kevin Manning | Report as abusive

Peter O has hit the nail on the head – fuel. With winter upon us both individuals and businesses alike will be wary of the cost of heating, lighting and transportation. If Mr Darling had had the nouse to drastically cut fuel at the pump taxes, thus making travel and the cost of commerce cheaper plus imposing a windfall tax on the electricity and gas suppliers; we would have seen everyone and all businesses benefiting. The economy could have shrugged off the dogged fear of fuel costs and risen above the recession!

Posted by Paul L | Report as abusive

A mishmash, spread too thinly to encourage any individual to feel better off.

If the money was to be spent at all, it should have been used to reduce VAT by a significant amount to encourage spending and to reduce Employers’ NICs to encourage them to reduce employment costs and keep people in work.

The whole exercise is a waste of money and nothing but a pretence of “helping” people and an excuse to raise taxes in due course.

Posted by Jason | Report as abusive

When public spending is too high and leading to excessive debt perhaps it could be strongly reduced by a 10% salary reduction on all public sector workes earning above £20000per annum.This to include pensions and an increase in retirement age to the norm of 65.

What we all fear is losing our jobs, losing our houses and being unable to support our families. Mr Darling’s general boost to spending will definitely help some people avoid that fate. However, we all know someone who is already facing that situation and it could so easily be us.

Can the Government please do something totally original like guarantee it will pay the interest or rent on the family home as long as the main breadwinner is fulfilling say a community service whilst looking for a better job. I’m sure people can be utilised to create wealth and keep their self respect while they are technically without work by working for the community in which they live whether in health, policing with the elderly even litter-picking or insulating lofts. Why pay people to stay at home when so many of our local services are neglected.

It would benefit the whole community and also help people in this situation maintain their self-respect. We mustn’t create another generation of long-term unemployed.

Posted by Paul Davies | Report as abusive

The fact this recession is global does not absolve this government from blame. It and the BOE believed uncontrolled credit and spending could go on without inflation worries. So they taxed and spent without any thought on the outcome. The huge number of daft jobs in the Public sector, overpaid doctors doing less work, Town hall bosses now earning collossal salaries and increases in MP’S pensions whilst all private sector workers pay for it.
Now they are trying to con us into believing they are the saviours. Shame on them. This borrowing may help in the short term but reducing interest rates and making public servants pay for their own pensions and working to 65 would reduce council tax by 25% and would help pensioners and the less well off.

Another ill thought out plan pulled out of the hat.
Shopkeepers already will have paid 17.5% vat on the stock they have already bought and wont be able to pass that on to the consumer for sometime. It will take weeks to change computer systems and reprice all stock in the shops and that in itself will all cost buisness more money.
A bit of a damp squib realy and although what the tories are saying isnt popular it is the truth, unfortunately the goverment is still playing to a generation of buy now pay later merchants, and the attitude is oh well well worry about it all later, highly irresponsible like everything else new labour thinks up. They are only in it for themselves. How about reducing foreign aid and cutting the 35 million a day budget we are paying to subsidize europe. Strip the public sector down. some old fashioned housekeeping would be a good start.
Dont spend what you cant afford, and in the good times save some for a rainy day and spend some on the good things. if this government and every other labour government had followed these old principles we wouldnt be in the mess we are.
I pity the tories having to come in after this lot, it will take years for them to sort out the finances and take all the flack that will go with it and then just when the books are balanced the country will fancy a change and ellect another tony blair, it happens everytime.

Posted by jeremy | Report as abusive

I would like to see a cut in the thousands and thousands of non jobs created in the public sector by this government. Even as we suffer the guardian is full of positions for diversity officers and the like on salaries of £30-45K. Labour has created ONE MILLION extra public service non jobs since it came to power. Imagine what they cost us – every year!

Posted by paul | Report as abusive

This is not a money problem – it is an ideas problem. You cannot get out of debt by getting more into debt. A recession (or downturn) is simply a natural readjustment. We have been spending our time and money doing the wrong things, we have people employed in the wrong jobs, our economic policies are wrong, etc. This readjustment must be made quickly and firmly by finding the causes and erradicating them not borrow more money to shore up jobs, policies etc that are quite clearly failing. Personally, I think it’s time for a complete shake up of party politics to ensure the avearge person has more say over the policies being put forward, the Inland Revenue to ensure that taxes are calculated and collected quickly and easily (as opposed to what we have now) and a shake up of government interference in the vast majority of private sector business. Most small businesspeople work as unpaid government operatives for several weeks every year. Surely the government should be working for us!

Peter Mannings comments above are valid. However, with reference to my comment posted above, the problems that the Tories inherrited in 1979 was inflation at 33%, interest rates at 15%, the unions running the country and everyone being paid so much that it was cheaper to import finished product from abroad than dig the raw materials out of the ground ourselves.

The Tories worked long and hard for 18 years and, just before being voted out of power in 1997, they had managed to repay the IMF in full. Since then, we have borrowed more and more money, increased public spending and frittered away our prosperity. Unfortunately, there is nothing else for it but to take some more Tory medicine. It will be painful but it will work. But this time around, instead of blaming the doctor when his advice worked and we recovered, how about we blame the real cause of the problem and remember in future elections that anyone can make all sorts of promises at the ballot box. What we should look at is “Have they ever done what they are proposing?” Only an idiot would trust their brain surgery to a carpenter or their finances to a brain surgeon.

Moderator: please amend my earlier comment to read “Kevin Manning” not “Peter Manning”. If this cannot be done, apologies to Keving Manning.