The fiscal stimulus is certainly necessary since monetary policy, even with interest rates cut to 1% or even lower as is likely, is clearly inadequate by itself alone to get the economy kick-started again. But in the PBR it was badly mishandled on at least three major counts. There is a much better way, and one that is wholly affordable, contrary to Tory claims.

The fiscal stimulus is now centrepiece in the political arena, but both the main parties miss the main point. Labour says if interest rates as low as 2% are still not enough to revive the economy, it’s necessary to inject a big increase in credit into the hands of consumers to raise the level of demand. The Tories say that borrowing another £20bn to do so through unfunded tax cuts is now unaffordable on top of already unprecedented borrowing to bail out the banks. Both ignore the obvious solution.
It’s certainly true that the means chosen by the Government to raise the level of demand isn’t really working. Merely exhorting the banks to pass on lower interest rates and expand lending is not enough when there are no targets for lending in exchange for the billions of taxpayers’ money and no sanctions if they fall short. Conditionality is the order of the day for the Government’s current welfare reforms, but what may be necessary for those on benefit is not being applied to the banks.
Equally the Government’s 2 ½% VAT cut clearly isn’t working either, not surprisingly when retail discounts are already being offered of 20-30% or more. A far more effective route would be to give people on the standard rate or below non-cashable vouchers for buying domestic goods and services so long as they’re used within the next 6 months.
The Tories’ arguments about unaffordability don’t stack up either. David Cameron has made clear he accepts that the ‘automatic stabilisers’ – benefits paid to those who lose their jobs – should operate normally in the recession. But these account for the great majority of the extra borrowing, raising the budget deficit from 3% to 7% of GDP. All that the Government has done is add another 1% on top. To argue that we can afford 7% to fight the recession, but not 8%, is unconvincing to say the least.
But there is a much more fundamental issue about affordability which both sides have chosen to ignore. A major source of funding so far completely untapped is the super-rich and the corporate tax avoiders. Admittedly Alistair Darling did in his PBR impose a 5% higher tax rate on those earning over £150,000. But that’s little more than window-dressing. It will raise only about £670m, it will apply to just 1.3% of taxpayers, and the revenue won’t start rolling in till 2011 when the money is needed now.
But it could be the right approach if taken further, as three examples might show. First, if the big CO2 polluting companies were required, as they will be after this last EU Council, to buy by auction a proportion of their permits, it could raise £20-30bn for the Exchequer. Shell and BP alone, which made windfall oil profits this year of over £20bn, are expected to make a further unearned profit of £9bn from being allocated these permits free over the next 4 years. They should be made to pay for them in full.
Second, a recent report entitled ‘The Missing Billions’ by Richard Murphy, a tax accountancy expert, detailed how the Treasury loses at least £13bn a year in tax avoidance by super-rich individuals plus another £12bn a year by the 700 largest corporations. In addition, a further £8bn is lost each year from artificial tax reduction measures including switching earnings to a family member or to a trust, offshore company or a tax haven. On top of this, tax evasion which is illegal is estimated to cost the UK a further £10bn a year at least. If even half of that total of £43bn lost each year could be clawed back by a more robust and better resourced HMRC, the fiscal stimulus need not depend on unfunded tax cuts or increased borrowing at all.
As another example, Inland Revenue statistics show that those paid over £100,000 a year, the richest 2.1% of the population, now receive no less than £8bn a year in tax reliefs and allowances. In the case of pension tax relief alone now costing the nation £36bn a year, higher-rate taxpayers get more than half. If these subsidies to the richest 2-3% of the population who need them least were drastically pared down, it could generate an additional £10-15bn a year for the Exchequer. And if the iniquitous non-dom loophole were removed, another £5bn a year would accrue to the Treasury.
For all these reasons the idea that the option is between endless further borrowing (Labour) or painful retrenchment and cuts (the Tories) is a wholly false antithesis. The ultra-rich whose wealth has grown astronomically over the last three decades should now make their contribution.
One other area where both the main political parties are united in the wrong policy is over public expenditure. Labour is proposing that, compared to previous commitments they have given, public expenditure programmes will be made subject to a big real terms fall of 2 1/2% of national income between 2011-2014, which amounts to some £37bn at current prices. The Tories are demanding even steeper cuts in spending, beginning earlier in 2010, on a far greater scale than the cuts in public services they proposed at the 2005 election.
This is the opposite of what is needed. What is really required is a carefully targeted increase in spending in those sectors now threatened by sharp decline or even meltdown, most notably construction and housing. It should be paid for partly by the increased taxes and NICs and reduced benefits generated by higher employment, partly by the surcharge on the super-rich and the corporate tax avoiders, and partly by increasing the minimum deposits which the commercial banks are obliged to hold at the Bank of England which could then be lent directly to the Government for new spending programmes.
Bearing in mind that that the £12.5bn spent on the VAT cut could have been used instead to build social housing for 100,000 families now deprived of a decent home, whilst also sending a huge multiplier effect in new jobs throughout the economy, all these alternative strands of policy together open up a far more desirable and effective way of fighting the depths of this recession. The crisis might even mobilise the political movement this country now so desperately needs to bring it about.

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