Osborne is too clever to fall for Balls’ silly tax cuts
Ed Balls is not silly, but his proposed tax cuts are – unless Labour’s shadow chancellor is planning a political trap rather than a financial stimulus.
He is suggesting a temporary cut in VAT or in income tax – he seems unworried which. Well, a stimulus to the UK economy would be useful, but borrowing more to pay for those tax cuts would add to the cause of the current problems rather than solve them.
The suggested VAT cut is a re-run of an old policy that Balls backed when Gordon Brown was prime minister. Chancellor Alistair Darling (the man with the job Balls wanted) cut VAT from 17.5 to 15 per cent for just over a year during the 2008/09 recession but it is highly questionable whether it did anything to revive the economy.
Reducing shop prices by 2.25 per cent is tiddling compared with the discounts that retailers think necessary to boost demand. It is unlikely the public noticed the cut, even if retail groups passed it on fully. And when it ended it is unlikely the reversal slowed consumption – which is why chancellor George Osborne felt he could raise the sales tax to 22 per cent in 2011 without doing any significant damage.
As a stimulant, VAT is simply inefficient. Cutting the basic rate of income tax by 3p, Balls’ other idea, is a better use of £14bn because, while it benefits all taxpayers, it makes the greatest proportional difference to low earners. It is a fair bet that most of the money would be spent rather than saved or used to repay debt. And if it is temporary, it might even encourage some companies and high-earners to bring forward income such as dividends into the low-tax period and thus spending.
But reversing either tax when the temporary period ended would do at least as much damage as the benefit caused by the cut. And that is probably what Balls is banking on. The Conservative-LibDem coalition raising VAT or income tax in 2014 would be a wonderful way for Labour to enter the 2015 general election campaign. By the time we voted, the rises would be pushing up prices and inflation or squeezing take-home pay.
Labour would take credit for pushing Osborne into cutting; the chancellor would take the blame for reversing them when the temporary period ended. You can’t blame Balls for suggesting the tax cuts – and you can’t blame the Tories for rejecting them. That’s politics.
