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Coffee House

Reagan, Keynes, Question Time and tax cuts

15 February 2013

12:18 AM

15 February 2013

12:18 AM

I was on the panel of BBC Question Time this evening, in Leicester. Ed Balls’ tricksy 10p tax proposal was raised, and I raised my reservation: it does very little for the low-paid. Balls says £2 a week, but Policy Exchange showed earlier how benefit withdrawal makes this a derisory 67p a week. And  this is the best the Labour Party could do to help the low paid? There should, I suggested, be a significant tax cut for the low-paid. That is to say: the equivalent of one extra month’s salary a year. So how, David Dimbleby asked, would this be funded? Any which way, I replied: it could be by finding greater savings in the still-gargantuan government budget. And, if needs be, by temporarily extending the deficit. There followed the immediate accusation that I was a Keynesian.

To me, it’s basic economics: if you cut taxes enough, the economy will grow in response. The question is whether the response will cover the cost of the tax cuts.  And if it doesn’t, what savings you can make in the government budget

[Alt-Text]


When the Swedish Conservative government cut taxes for the low-paid, in response to the crisis, they found more people moved from welfare to work. So welfare bills fell and tax receipts rose. So Sweden’s tax cut paid for itself. Does that make Anders Borg, Sweden’s ponytailed supply-side finance minister, a Keynesian? Or just someone who has a clue about economics, and wants to apply a mixture of methods to grow the economy?

I only raise this because George Osborne has his own label to reject this: Reaganite. His analysis — a jargon hangover from the 2005 Tory wars — is that David Davis and his allies were swivel-eyed un-British ‘Reaganites’ because they believed in the concept of self-financing tax cuts. (Reagan’s strategy was to stave the beast, cut taxes and shrink government that way.) Danny Finkelstein developed this theme further, calling it “punk tax-cutting”. So those who ask Osborne to cut taxes now are dismissed as Reaganite punk tax cutters, etc. It was a clever attack line for 2005, but seems to have congealed into an economic policy and led Osborne to reject out of hand the tools which other countries have been using to spur growth. (In Sweden, Borg has followed up with a major deficit-financed corporation tax cut.)

Anyway, here is Osborne offering his ‘Reaganite’ definition in the 2011 Spectator Christmas special:

“I am a fiscal Conservative, I’m not a Reaganite deficit-funded tax cutter. I am actually in that sense more the model that Margaret Thatcher and Nigel Lawson pursued. That means sorting out the public finances – and if there is a surplus, then use that to reduce taxes. That’s what he did in the late 80s.”

Problem is, there won’t be a surplus — not under Osborne’s plans, anyway. They now run to 2016/17 and there are deficits as far as the eye can see. While Osborne is seemingly appalled at the idea of deficit-financed tax cuts, he seems relaxed with deficit-financed spending. (Only the former, by his definition, threaten ‘stability’ and ‘sound money’. And QE poses no threat to the latter, apparently).

There was a question tonight about how all parties are the same, and it’s becoming depressingly true for economic policy. Osborne is now “dealing with the debt” by increasing it by 60pc from 2010-15, precisely as Labour planned. Like Brown, he seems to regard tax cuts as a reward for good behaviour rather than a basic tool to spur growth. Like Brown he has faith in QE and artificially cheap debt, and is relaxed about the resulting inflation. Like Brown, he uses five-year plans which deny him manoeuvrability. Like Brown, he has no plan to balance the books. I’m not quite sure how those of us who opposed Labour’s plans can be expected to cheer Osborne now, given the similarity of both methods and (alas) outcomes.

There is another way, and it was indeed outlined long ago by an American president. But it wasn’t Reagan. In 1962, JFK had this to say:

‘Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget — just as it will never produce enough jobs or enough profits…

‘In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.’

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