Thursday, 27 November 2008

Less than impressed

There is more scope for arguing about who is responsible for the economic downturn than one might believe, listening to Brown and Darling, but there is absolutely no question that the downturn is a very serious problem. There are two possible responses to a downturn of this nature – do nothing, or intervene.

The Tories' 'do nothing' approach is basically a return to the 1980's, when their leaders attempted to tell us that 'the market' would deal with the problem, and that unemployment was good for us. Since that unemployment (then, as now) would fall predominantly on the sort of communities which would never vote for them, they largely got away with it, and the selfishness and greed which to many of us personified the Thatcher years moved into full swing.

In fact, it mostly carried on in an untroubled way until that very greed and selfishness brought our banking systems to the verge of collapse. (And it's interesting, as an aside, that the Tories' aversion to intervention in the market to help ordinary families does not extend to an aversion to bailing out the gamblers and speculators who created much of the problem – and who just happen to largely fund the Tory party.)

I am by nature more of an interventionist, believing that governments do have a duty to manage the economy in the interests of the people and to intervene when necessary to achieve that end, so I started out broadly sympathetic to what the Chancellor was trying to do. Sadly, I think that the measures that he has announced fall well short of what is required.

I welcome the increase in income tax for the highest earners of course, but it does look a little bit like too little too late – it doesn't even take effect until 2010. Improvements to benefits are always a welcome move. But these are comparatively minor steps compared to the 2 major items – and both of those are seriously flawed.

The first failing is to try and use VAT as his main weapon. Now, as a general rule, I would tend to argue for more direct taxes and fewer indirect taxes, since that is a more progressive way of raising revenue. But in a crisis where the need is to stimulate the economy, I really do suspect that giving people more to spend would have a greater effect than reducing the prices of the things on which they will spend it.

I am simply not convinced that 2.5% off VAT is going to stimulate the economy very much. It would have been far better to raise income tax thresholds, which would directly target much of the extra help at the lowest earners. And for the very lowest paid, many of the items that they are struggling to pay for are essentials which are VAT-free in any event. Far from helping the lowest paid, if the reduction in VAT provides any stimulus at all, it will surely be for those who are middle or higher income earners.

The second is the increase in cash available for spending on capital projects. It seems like a very good idea at first sight, but I wonder how quickly it can actually be made to happen. Public capital projects get slowed down for all sorts of reasons, not just lack of cash. Indeed, one of the reasons why so many public authorities carry such large levels of reserves is that they often have difficulty spending their capital as quickly as they might wish, so they pop it into the nearest Icelandic bank until they can actually spend it. It simply is not lack of capital which is holding back the capital projects much of the time; and to suggest that it is looks like a serious misunderstanding of the way in which public sector projects work.

Some of the delays are down to bureaucracy, some are down to non-availability of staff to manage and oversee the works or specialist staff such as surveyors and architects; and the public sector procurement process is notoriously slow, even when the project is ready to go. In this context, whilst the extra £140million for capital projects in Wales is something to be welcomed, I can only give it a cautious welcome until we know whether it can actually be spent. An extra £140million simply added to public sector reserves would not actually achieve very much.

Finally, rather than increasing the size of the black hole in public finances, there are things that the Chancellor could have done to close the gap, other than merely promising us tax rises in the future. He could have scrapped the introduction of ID cards; he could have announced the scrapping of the utterly pointless programme to build a new generation of nuclear weapons, and he could have prevailed on Gordon Brown to get UK forces out of Iraq and Afghanistan. Any or all of these would have helped, but in defiance of all reason, they all appear to remain higher priorities for the government than action to help ordinary people.

1 comment:

alanindyfed said...

An admirable overview of the situation IMO,with the weaknesses of Labour and Conservative approaches brought to light. Can we foresee a future Welsh Chancellor in the making?
The economic situation is indeed dire and its consequences are widely underestimated. Only a radical revision of the fundamentals of the capitalist and consumer-driven economy will address the real issues.