Tuesday, October 21, 2008

Lib Dem tax cuts would be fiscally neutral

The other day I wrote a posting asking whether the Liberal Democrats can still credibly promise tax cuts given the gravity of the global economic situation. There was a flurry of comments, but I was not near a computer while it happened and so could not take part in the debate.

That debate concerned the desirability or otherwise of Keynesian reflation. In fact, the proposed Lib Dem tax cuts would be paid for by spending cuts so they would be fiscally neutral. They would not affect the total level of spending in the economy.

This was news to Dianne Abbott on This Week a few weeks ago. She obviously thinks that Keynesian reflation means more public spending. But tax cuts that were not funded by a reduction in public spending might do the job just as well.

More alarmingly, it would also be news to our current chancellor. Last year he complained that Tory tax cuts would "take £21 billion out of the economy".

3 comments:

Anonymous said...

A fiscally neutral tax cut would be deflationary rather than reflationary because the multiplier for tax cuts is less than that for public spending. The total level of spending in the economy would fall because a proportion of the money given away in tax cuts would be saved rather than spent.

Jonathan said...

Fair point, though the "fiscally neutral" phrase came from St Vincent of Cable on The Week. The posting should be headed "Lib Dem tax cuts would be mildly deflationary".

The important point - the the Lib Dems are not proposing Keynesian reflation - still stands.

Peter Black said...

As I understand it the 16p tax rate (i.e. a 4p cut in the basic rate) will be paid for by increased taxes on wealth and green taxes. It would be a revenue neutral package. The second £20bn package of savings in public expenditure would largely be used to increase spending in our priority area e.g. cut ID cards to pay for more police. If there is any money left over then further tax cuts will be made.