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.

11 Responses

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  1. […] Wheldon has called these proposals modest. So do we. We would like to see more tax cuts to get the economy […]

  2. Dave Holden said, on June 16, 2011 at 10:37 am

    Frankly paying attention to Balls does you no credit. The man is a complete incompetent largely responsible for ignoring the biggest asset price bubble in human history while all the while crowing about no more boom and bust.

    On the VAT cut suggestion – well it fits into your (and my) thoughts on getting the balance of risks correct – it’s not exactly an epiphany, it is of course in good part Balls politicking – we all know that’s his favourite past time;)

    You could equally argue an increase in targeted infrastructure spending of 12-13bn would be a better short to medium term investment.

    • duncanseconomicblog said, on June 16, 2011 at 10:42 am

      The advantage of a VAT cut is it’s easy to reverse – and the house building plan is infrastructure…

      • Dave Holden said, on June 16, 2011 at 11:04 am

        Since this has been done before I guess they should have reasonable data on how effective the last VAT cut was.

  3. Luis Enrique said, on June 16, 2011 at 3:01 pm

    I’m not at all sure – how good is the increased spending prompted by a VAT (assuming people just don’t use it to pay off debts quicker) at generating jobs? I know retail and the trades both employ a lot of people, but a lot of consumer goods are imported.

    have you read this?

    http://www.thefiscaltimes.com/Columns/2011/06/10/What-Really-Matters-for-Growth-Its-Not-Tax-Rates.aspx

    I do wish there were more concrete infrastructure spendign ideas – energy, water, communications, transport. And I’d like the govt to come out and say it will spend money – in an employment intensive way – of improving the environment we live in, I mean everything from picking litter and improving public spaces, to rennovating and renewing the housing stock and old ugly public buildings.

    • metatone said, on June 16, 2011 at 5:51 pm

      I’m the commenter who thinks Duncan is a bit stuck – this is better, but I think that without evidence about the fears of the bond market, it’s easy to criticise either way. After all, if we’re afraid of the bond markets, why is £12bn acceptable? Or if we understand that the bond markets have not reacted well to Irish kamikaze-style austerity, why is £24bn not acceptable?

      I don’t often agree with Luis, but I have to echo this:

      “I do wish there were more concrete infrastructure spendign ideas – energy, water, communications, transport.”

      There’s a huge level of denial in our political elite about the really poor state of Britain’s infrastructure. Water (and sewage) is potentially the most important problem long term, because when it goes bad, it will be ugly. However, that’s a long term problem so I can understand the short-termists not bothering with it.

      But transport and communication improvements could be boosting our economy within 2-5 years. There are lots of good left-of-centre friendly reasons we’re not as productive as Germany, but one more structural issue is just transport. Hours of people-time are wasted in traffic, money is lost on logistic problems. There are real economic benefits. Even the NHS would be more efficient simply through improving transport – (logistics for the service are not a small issue.)

      Comms bottlenecks are a bit more complex, but they exist – and arguably in the medium term comms will be more important than transport…

      Building housing (as proposed) is a good move in terms of rebalancing the economy, so I applaud that.

      • Dave Holden said, on June 17, 2011 at 11:26 am

        All good suggestions – if there’s twelve billion to spare I’d vote these rather than a temporary VAT cut.

        The question of course is there that money to spare?

        From

        http://www.theatlantic.com/magazine/print/2011/06/the-vigilante/8503/

        Talking about the US position:-

        Reinhart, who has done extensive research on the topic, was even more dismissive of Krugman’s analysis. “Are interest rates a good indicator of impending crises? The resounding answer is no.” Deficit doves seem to assume that bond interest rates will act as a sort of early warning system: when they start to creep up, then we should start cutting our deficits. But Reinhart argues, “Before the crisis, Ireland’s rates were imperceptibly higher than Germany’s.” By November 2010, the Irish were paying an extra 6 percent annual interest to borrow money. “I certainly wouldn’t call this my baseline scenario for the U.S.—but the message is: think the unthinkable.”

  4. Paul Newman said, on June 17, 2011 at 9:16 am

    So the coalition policies are just slightly off perfect in your view then ( bar a gimmick or two) . Thats a pretty good endorsement Duncan but both you and Balls have been dragged kicking and screaming into the land of sense and , as you have obviously noticed your denial has lost you all credibility .

  5. Contradictions | Historinhas said, on June 18, 2011 at 3:29 pm

    […] can’t get enthused one way or the other about Ed Balls’ call for a temporary cut in VAT. This is because of a more general point – […]

  6. […] be as easy to implement as to reverse while the cost to do so is way under borrowing forecasts (the former being around £12-13bn versus the latter of £40bn). But alas the horrible show must go […]

  7. […] can’t get eager one way or a other about Ed Balls’ call for a proxy cut in VAT. This is since of a some-more ubiquitous indicate – […]


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