Taxes reduction

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If the cuts don’t work, we bank on Mr King Anatole Kaletsky Timesonline 22Sept2010

Official forecasts look good, but what if growth doesn’t happen? Don’t look to the coalition for a plan B
Everyone likes to sound original. So because it seems very obvious that the economy and the coalition Government are about to suffer a series of potentially crippling body blows from the toughest programmeof tax increases and spending cuts since the 1930s, the original thing to say these days is that the cuts are going to be successful, both as an economic policy and as a political strategy.
At the cost of sounding boringly unimaginative, let me explain why the more conventional view about the fiscal cutbacks is probably right. We must begin with a genuine paradox. It is generally assumed that theharsh public spending cuts that will be announced next month by George Osborne will be highly unpopular, but that voters will accept them as the price to be paid for restoring the Government’s credit and improving the nation’s economic performance. The political reality, however, is the other way round.
Many voters are quite enthusiastic about cutting spending, reducing welfare benefits for thework-shy and extravagant pay and pensions in the public sector. The trouble is that these cuts, desirable as they may be for the economy and the social fabric in the long term, are more likely to damage than to improve growth or employment prospects in the next year or two, and an economic slowdown, if it happens, will thwart the Government’s deficit reduction plans.
Thus the greatest challengeto the Government next year will not be the harshness of the spending cuts. It will be the risk that these tough budgetary policies fail to achieve their advertised objective of strengthening the economy and improving public finances.
For David Cameron, this situation will not be disastrous, since many of his Tory supporters will relish the decimation of the public sector, as well as lookingforward to a probable election victory if the economy eventually recovers by 2015. But this long journey to 2015 is much riskier for the Prime Minister’s two co-pilots.
Why two co-pilots? Because Nick Clegg is not the only British leader pinning his reputation to the Government’s economic strategy. The other is Mervyn King, Governor of the Bank of England. I am not suggesting, as some Labour spindoctors have unjustly hinted, that Mr King has “sold out” to the Tories. Mr King has always been a scrupulously non-political public servant who works just as hard for the success of the British economy, whether Labour or the Tories are in power. But the Governor has now linked his reputation to two risky propositions that are unconnected with politics in his mind, but are in truth political to thecore.
The first is that the Government’s planned budget cuts are indispensable for Britain’s financial stability. The second is that Britain’s economy will not be pushed by these cuts back into recession or prolonged stagnation because the Bank of England can use monetary policy to offset any losses of spending power suffered by welfare recipients and public employees.
The first proposition can bedebated forever, since everyone agrees that some cuts in borrowing are necessary but nobody can be sure how far and how fast the consolidation needs to proceed. The important issue is the second. Can monetary policy really avert a serious setback to the economy, no matter how big the cuts?
Mr King believes the answer is “yes” and, speaking purely as an economist, he is probably right. Eventhough short-term interest rates are already near zero, the Bank has many more ways to stimulate demand. By resuming its policy of quantitative easing, the Bank could push interest rates on long-term government bonds, which are still at more than 3 per cent, much nearer to zero. This would reduce fixed mortgage rates and bond rates, encouraging homeowners to borrow and forcing savers to spend their...
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