Finking about stimulus

Green Politics

The position of Fraser Nelson and Guido Fawkes on deficits should hearten the left. Tax cuts are stimulative but spending rises even more so.

Keen blog readers will have been following the fascinating debate over deficit-findanced tax cuts between Danny Finkelstein on the one hand, and Fraser Nelson and Guido Fawkes on the other. The left should be heartened by the latter’s position.

Yesterday, Finkelstein, the fiscal hawk, wrote: “If the Tories were now to cut taxes immediately upon on entering office, what would happen? It would, erm, destabilise the economy, wouldn’t it.” Guido responded:

“bond traders understand that a growing economy supports their coupon payments, whereas a flat or contracting economy is a greater sovereign credit risk. A growing economy can afford to finance a budget deficit if necessary. An over-taxed, low to no growth economy can’t. High taxes, and Britain is a high tax economy after 13 years of Gordon, destabilise the foundations of a strong economy, driving enterprise into the ground or overseas.  Guido remembers when this was ideologically core to Conservative thinking, it was when they won elections…

Today, the Fink replies:

“He is forced into that position by his view, cogently and frequently advanced, that tax cuts should always be proposed since they force the state to cut spending.”

But that’s not quite right. Guido does want tax cuts to be offset by spending reductions but, recognising that spending cuts are politically tricky, believes “in the realm of lesser evils” that deficit-financed tax cuts are stimulative. And he’s right – but spending rises are even better.

During the stimulus debate in the US, much was made of Congressional testimony by Mark Zandi, the Chief Economist of Moody’s Economy.com, an independent provider of economic analysis. In this updated report assessing ‘The Impact of the Recovery Act on Economic Growth‘, Zandi outlines the “bang for the buck” from different aspects of the US fiscal stimulus. While some tax cuts delivered increases in GDP beyond the amount pumped back into the economy, it shows that spending increases were the most efficient form of deficit spending.

The key to recovery is growth. Some tax cuts – like the Government’s VAT cuts or Obama’s tax rebates – can play a stimulative role. But as this independent study shows, government spending is the most efficient way to address the low aggregate demand that typifies the current recession.

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33 Responses to “Finking about stimulus”

  1. He's Spartacus

    Which would be fine and dandy if Labour had any intention of cutting spending.

  2. Anthony Painter

    RT @leftfootfwd: Why @GuidoFawkes is right about the stimulative effect of deficit-financed tax cuts http://bit.ly/bTSe1u

  3. Jessica Asato

    RT @leftfootfwd: Why @GuidoFawkes is right about the stimulative effect of deficit-financed tax cuts http://bit.ly/bTSe1u

  4. David Coats

    Well said Will. This is exactly right. The problem with the Tories is that they have forgotten all about Keynes. Without growth everything else is wishful thinking…and Finkelstein style fiscal sadism is certain to push us into a double dip recession. We need robust arguments on the left to get the market fundamentalists back in their box and keep them there. Most importantly, the political task is to get the Tories reading the General Theory again. If Macmillan found the arguments compelling then today’s Tories should too. That they don’t tells you something about their preparedness for the tough choices (and fine judgments) demanded in government. Deficit reduction does have to happen at some point, but start too soon and disaster will follow.

  5. dave jones

    Double dip recession is an absolute certainty – the only issue is whether the election comes before the second dip, then it will be Cameron’s fault!

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