Duncan’s Economic Blog

Ed Balls’ Modest Proposal

Posted in Uncategorized by duncanseconomicblog on June 16, 2011

A commentator asked yesterday if I thought the UK economy was simply stuck. I’ve argued in recent days that the prospects for the recovery are weak but also that fiscal policy is constrained and the left needs to acknowledge this – so I can see why people might think I am throwing up my arms and saying ‘we’re all doomed’. But I’m not.

There is always an alternative.

And today’s Ed Balls speech helped outline such an alternative.

No doubt the Tories will attack Balls speech as a reckless plea for more spending and more borrowing. They’ll call him a deficit denier and say he is not serious about dealing with the public finances. But they’ll be wrong.

Because the interesting thing about the Balls speech today is quite how modest the proposals are.

He isn’t making the case for a major stimulus or the reversal of deficit reduction. He is simply setting out a growth plan that is credible, affordable and, I suspect, would likely be effective.

A temporary VAT cut would instantly lower inflation, increase real wages and put money in people’s pockets. It would directly ease the crisis of living standards that is one ofBritain’s major economic problems of the day.

But it is also easily reversible and the timing of its rise could be set out in advance – making it a much easier sell to markets.

It would cost something in the region of £12-13bn. Which sounds a lot, but in the context of the borrowing forecasts recently being raised by over £40bn anything which helps restore a decent rate of growth is helpful.

The UK economy is 4% below it’s pre-crisis peak – one idea would be to announce that VAT would return to it’s previous rate once this 4% was made up.

Such a move would be widely welcomed by retailers and other businesses.

Combined with the fiscally neutral package of using a bonus tax of around £2bn to fund house building, a youth employment programme and more regional funding growth – the Balls plan outlined today would help increase growth, lower unemployment and alleviate the squeeze in living in standards.

Notice that the majority of the package is based around tax cuts – this is hardly a return to Brownian tax and send solutions.

Personally I’d like to go a little further – increase investment allowances to encourage more capital investment. But this is an excellent start.  

Sadly the OBR isn’t allowed to test the effects of opposition plans on growth, employment and the deficit. A great shame – as I imagine  this would score highly.