Tuesday, November 25, 2008

So, how stimulated do you feel?

Has the 2.5% reduction in VAT made you rush out and buy an extra packet of jaffa cakes in excitement? Has Darling mobilised you as one of his army of consumers doing their bit for Queen and Country by making additional superfluous purchases?

Nah, me neither. However, there is an interesting thing here (apart from the slight of hand that allows the Chancellor to sell us a VAT cut today to be paid for by National Insurance increases in 2010, I mean thanks a bunch from every low paid worker in the country Al).

The government's Pre-Budget Report is extremely optimistic and they seem to have based cast iron policy on something they acknowledge might be a bit shaky. But that's okay because we'll only find out after the next election so what's the problem? So we can have a "stimulating" package today which we will pay for after the recession is over later 2009. Except if it isn't over then we'll be paying the price of high borrowing and increased NI contributions in the middle of a recession, that may have taken a turn for the even worse.

Prudence? Not much. Sounds more like a roll of the dice to me. I mean is this the tried and tested way out of a fiscal crisis caused in part by people spending money they haven't got... by encouraging them to spend even more. Ignore your credit card bill people there tat to stock up on!

To put this in context, and sorry for stating the obvious here, but we have an unprecedented economic crisis focused around the financial sector. We've never seen the kind of huge bail outs of mega-institutions before, nor have those institutions been so integrated into every part of the global economy. How can anyone be so certain what the global economy is going to be doing this time next year?

I mean I know a 2.5% cut in VAT is a powerful tool and that - but it ain't so powerful to stave off a global economic crisis that Labour can't do anything about. That crisis wont be the fault of the government but these policies at this time are leaving us open to risks that seem to be almost entirely motivated by the political cycle rather than the required long term economic restructuring.

And another thing!

This cut in VAT is going to "inject" over £12 billion into the economy, or as others may like to put it that's £12 billion the government wont be receiving in tax revenues which it hopes to accommodate through economies and borrowing.

That's economies like the 80,000 public sector jobs the government has already slashed. In the pipeline we have massive government job losses on the horizon. Over the period to 2011 there are tens of thousands of redundancies planned in the public sector. "10,000 in the Ministry of Justice, 12,500 in Her Majesty’s Revenue and Customs (HMRC) and 10,000 in the Ministry of Defence (MoD)." But don't worry - they're hiring 2,000 more job centre workers to help them all sign on!

Charming, but so long as they dress this up as "efficiencies" we'll all go home smiling (unless we're the ones who've been laid off). What happened to the Keynesian consensus then? I thought the government was meant to lessen the impact of the recession not use it as an excuse to put people out of work.

Instead of cutting VAT (which no one really seems to know whether this will effect prices, profits, spending or what) why not spend a portion of that £ 12 billion on keeping those workers in work, as productive, tax paying members of society and use the rest to "stimulate" employment by directly investing in green collar jobs.

We have to move away from an economy that's sustained through bizarre house prices and borrowing. Instead Darling just wants us to get back to the good old days that got us here in the first place. It comes to something when calling for borrowing less and investing to stabilise the job market is the radical solution - but blimey it seems that's just where we are.


scott redding said...

An interesting way to look at it: Brown will build up more debt, from 2008/9 to 2013/4, than was built up in WWI.

miot said...

Given that I'm currently living (rather well) off things that people bought which they didn't need and I managed to get second hand (apart from food though some of my fregan friends could include that)... this all seems rather odd from my perspective. Tragic perhaps. But then maybe I have no grasp of economics.