We’re all tax cutters now. All the main political parties are united in their support for a tax reduction to help the country deal with what is likely to be a very deep recession.
Such generosity has to be paid for, however, and that’s where the unity breaks down. The Tory proposal of a National Insurance holiday is claimed to be self-funding, while the LibDem plan to reduce the basic tax rate is covered by ‘closing loopholes’ and increasing green taxes.
It is only Labour, led by a resurgent Gordon Brown, that is advocating a true ‘fiscal stimulus’ by using borrowing to pump prime the economy. We will see the detail in the Pre-Budget Report on November 24.
Brown might be a lone political voice at home, but internationally he is garnering huge support. China, the US and Germany are adopting his expansionary approach and a wider agreement could be reached at the G20 ‘Bretton Woods II’ meeting in Washington.
The PM is also supported by none other than the governor of the Bank of England. Mervyn King suggested this week that in the current circumstances it would be ‘perfectly reasonable’ to use a fiscal stimulus.
With unemployment at an 11-year high, the economy set to shrink sharply next year and inflation likely to become negative, the government has to act swiftly to avert an economic disaster.
But King offered some sensible caveats. Any fiscal expansion must be temporary and based on a medium-term plan to bring the public finances back into line, he said.
That was, of course, what the fiscal rules were meant to do. They have now been effectively abandoned, but the chancellor does have an opportunity in the PBR to offer some new rules for a new era.
Alistair Darling needs to go further than just putting the existing rules into abeyance, and must provide a new fiscal framework appropriate to the current economic climate.
The stakes are high for both chancellor and PM, and mistakes at this time will have huge economic and political consequences.
