Pre-budget memo to Mr Osborne: Tax cuts for the many, not the few will boost growth


E-mail-sign-up Donate

 

.

Laura Bradley is a researcher at the Institute for Public Policy Research (IPPR)

The budget is likely to be another platform from which the chancellor tells us that slashing red tape and cutting business taxes offer the best route to economic recovery – but it is becoming increasingly clear that this approach is not creating the stimulus needed to kick start growth.

George-Osborne-budgetInstead the UK is currently ranked as having the second slowest recovery of the G8 (with only Japan doing worse following the Tohoku earthquake).

One important explanation for our sluggish growth is the fact the government has been putting all its eggs in the wrong basket. Cutting corporation tax seems to be the weapon of choice for the chancellor – it has been falling and by April 2014 the rate is set to have fallen to 23 per cent from its original 28 per cent in 2010.

This might seem like an effective way to support businesses in tough economic times but it is a less effective tool than it seems.

This is because cutting tax does not create the same amount of demand that is created by government spending. Tax cuts for businesses lead to a far greater proportion leaking out of the economy in the form of imports of goods and services which does nothing for stimulating growth.

This is why the Office for Budget Responsibility (OBR) concluded (pdf) in June 2010 that  government spending will be the main contributor to future UK growth, something that can have up to twice the impact of tax giveaways.

The chancellor should take notice of President Obama’s conclusion that “we can’t just cut our way into growth”. The US approach has seen more success than our own. Last year, US consumer spending increased by 2.2 per cent whereas in the UK it shrank by 0.8 per cent; in February, the US brought its unemployment level down to a three-year low, having created 227,000 jobs.

The IMF are increasingly likely to raise their US growth prediction while the UK’s projections have been reduced and are accompanied by a warning that economies such as ours should be careful not to cut spending too deeply or too quickly.

If the chancellor is going to allocate our precious resources anywhere then surely it should be where it will make the most impact. Unfortunately, the chancellor is allergic to any direct government investment in growth reflected in the steps taken by Obama.

 


See also:

US recovery shows the failure of Osborne’s ‘Voodoo Economics’ 12 Mar 2012

Osborne’s solution to unemployment? Make it easier to unemploy people 7 Mar 2012

Britain 2012: Some families have only £2 per person per day for food 5 Mar 2012

UK unemployment rate overtakes US for first time since recession started 15 Feb 2012

The US has turned a corner in unemployment; can we follow them? 6 Feb 2012


 

But there are other options available to him. Most importantly he has the ability to increase the purchasing power of individuals in the UK, which would in turn help to stimulate demand and boost employment.

Increasing the personal allowance or reducing VAT are two alternatives that could help achieve this. Today, US economist Eric Beinhocker has put forward a solution based on one of Obama’s stimulus measures. His analysis shows that a 2p cut in employees’ National Insurance contributions (NICs) over the next two years would result in an additional £7 billion per year of household income and between £2-4 billion in additional related growth.

For any stimulus measure to work, it would have to be paid for by increased taxes rather than additional government cuts. Cutting NICs would cost £5.5 billion for each year – but the cost could be made up within six years through increased revenues generated from higher growth along with the proposed mansion tax (£) would pay for the policy.

This is a win-win situation for the government and would add weight to the claim that we are “all in this together”.

 


Sign-up to our weekly email • Donate to Left Foot Forward

This entry was posted in Sustainable Economy and tagged , , , , , , . Bookmark the permalink. Post a comment or leave a trackback: Trackback URL.
  • Anonymous

    Big assumption that’s wrong, sadly.

    To get growth, you need investment not spending.

    If you give tax cuts to the many, most of that money will go on spending, or paying off debt for the prudent. That doesn’t produce much growth, and long term, once spent, its gone.

    The rich have discretionary income, so will invest.

    Now if you want the benefits of that to go to the many, you need to make sure that the tax cuts aren’t spent but invested.

    You also need to make sure that they aren’t getting into more debt as well.

    You won’t do that, since you’re the major cause of the debt, and its state spending.

  • Anonymous

    hat government spending will be the main contributor to future UK growth

    =========

    This is bollocks.

    Brown spent like mad, borrowed like mad, and the result was a recession.

    More spending and borrowing won’t cure a recession caused by borrow and spend.

    Financial voodoo.

  • Pingback: IPPR()

  • Pingback: William Bain()

  • Pingback: Carol Alevroyianni()

  • Pingback: David Hadley()

  • Pingback: Dr Catherine Walker()

  • Pingback: Jimmy Graham()

  • Pingback: Richard Darlington()

  • Pingback: James Mills()

  • Mr. Sensible

    LordBlagger, since it was the actions of the bankers that got us in this situation, your assertions simply don’t stack up.

  • Pingback: David Nash()

  • Pingback: Daniel Pitt()

  • http://twitter.com/Newsbot9 Newsbot9

    I see, Brown is the global finance system. You’re right, you ARE using financial voodoo.

  • Lord Blagger

    So lets see.

    1. Brown overpaid for the bank shares. Didn’t let them go bust.

    Losses 70 bn.

    2. Other government debts – 7,000 bn. Not the 1,050 bn reported, because they have left off all the pensions. Hidden them just like PFI.

    So the bank losses are 1% of the total government mess.

    Since when were the bankers responsible for governments not investing pension contributions, and spending the cash?

  • Nick Leaton

    See the previous reply.

    Government debt 7,000 bn
    Bank bailout (most cost down to Brown) 70 bn

    Banks – 1% of the problem. Government 99%

  • Pingback: Alex Braithwaite()

  • Pingback: Foxy52()

  • Pingback: Martin Steel()

  • http://twitter.com/Newsbot9 Newsbot9

    Yes, you’re using voodoo economics. How is pointing out your voodoo helpful? Oh right, it makes it clear you’re part of the feral 1%. Thanks for that.

    The pain needs to be shared by everyone who doesn’t own large chunks of stock.

  • Pingback: Inna Mood()

  • Pingback: Richard Darlington()

  • Pingback: Citizen K()

  • Pingback: Another day, another downgrade | Left Foot Forward()

  • Pingback: IMF tells Britain: If your economy fails to recover, it's time for plan B | Left Foot Forward()