Combining fiscalcredibility growth and Lambert, Evan Davis, Dan Corry & Gerald Holtham Holtham Gerald & Corry Dan Davis, Evan Lambert, Responses from Gavyn Davies OBE, Sir Richard Richard Sir OBE, Davies Gavyn from Responses OSBORNE’S CHOICE CHOICE OSBORNE’S 1 1 I a n Mulheirn n

SMF SMF Foundation. the andthoseauthorsof not represent do opinion corporate a the of andorganisations companies. Theviews publicationsexpressed in are publicationsbythesale of by and voluntary donations fromindividuals, independentguarantee.is It anyofparty political orandgroup financedis TheFoundationregistereda is acharity and limitedcompany by operate. marketsoftheperformance and the social withinframework which they andeconomicfields, social with viewa stimulating publicto discussion on papersbyindependentotheracademic and experts key topics the on in TheFoundation’sactivitymain tois andcommissionp SOCIAL THE MARKETFOUNDATION document. writtenpermission both of thecopyright ownerand thepublisher thisof mechanical,photocopying, recording, or otherwise), withouttheprior transmitted,system, inor anyform byany means or (electronic, publicationmaybereproduced, stored orintroduced into a retrieval Withoutlimitingthe rights under reservedcopyright above,part no thisof rightThemoral theauthorsof hasbeen rightsasserted. reserved. All ©Copyright TheSocialMarket Foundation, 2012 Tufton Street, 11 SW1PLondon 3QB Feb TheSocialMarketFoundation, FIRSTPUBLISHEDBY Mar CHAIR nltcl otiuin o ulc eae SF a a og rc rcr of record onwork economic fiscalgrowth and strategy. track long a has SMF debate. form public to which contribution analytical papers occasional are papers Analysis SMF ANALYSIS SMF MEMBERS OF MEMBERS THE BOARD Vis Lord (John) Lord Hutton DanielFranklin count (Tom)Chandoscount ruary 2012ruary y Ann Sieghart Ann y

2 2 Ian MulheirnIan DIRECTOR Pomeroy Brian CBE GrahamMather IvensMartin

u blish original p r o SMF’s of art a rcnl a pcait dio t te ok n Pnin Committee Pensions and Work intotheWorkinquiry Programme. the to advisor specialist a recently was National the and Credit and welfare-to-work, on work influential Tax SMF’s the led Ian Wage. Minimum Working the of evaluation and London in education higher worklessness and of drivers the into research work undertaken also has He to funding. welfare investment, child & 39 including areas 42 savings policy poverty, of variety a in worked has He Chief Treasury. at the HM advisor economic as an as Foundation 37 years three Market after 2008, Social February in the Economist joined He 2008. October Marke Social the of Director appointed was Mulheirn Ian ABOUT THE AUTHOR 35 33 Holtham Gerald from Response Corry Dan from Response Davis Evan from Response Lambert Richard Sir from Response OBE Davies Gavyn from Response RESPONSES 11. 10. 5 9. 8. 7. 6. 5. 4. 3. 2. 1. Summary CONTENTS utn taltgte 23 24 13 20 11 growth boost and deficit the cut 9 to measures Five together it all Putting growth plan credible fiscally a Designing 10 16 multipliers? of fiscal size the about know we do What problem borrowing The problem growth The strategy reduction deficit The Introduction h Got essct’dbt 14 debate cuts’ versus ‘Growth The uniyn h tmlseet 30 effect stimulus the Quantifying ocuin 32 Conclusion 3 3 Fudto in Foundation t

SMF SMF Gerald Holtham,Managing Director,CadwynCaptial consider thecontentofdeficit much deficitorhowfasttotryandreduceit, It isvaluabletostepaway former headofglobaleconomics,GoldmanSachs Gavyn DaviesOBE,FulcrumAssetManagement,and the Coalition The Mulheirnplandeservescarefulconsiderationfrom Evan Davis,BBCTodayProgramme credibility andgrowth the polarisedargumentwe’rehavingbetweenfiscal tobreakdown At last.Apaperonfiscalpolicythattries the Economy the Economy and formerSeniorAdvisertothePrimeMinisteron Dan Corry,ChiefExecutive,NewPhilanthropyCapital largely beenoverlookeduntilnow newangletothedebatethat’s This isanimportant CBI Sir RichardLambert,formerDirector-Generalofthe economic solutiontoit. neatly outlinesthatdilemmaandoffers apoliticaland -17, buthealsoneedsgrowth. Thisinnovativeplan deficitby2016 proposes tocutafurther£15bnfromthe George Osbornemustactsoontoidentifyhowhe

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In November the Office for Budget Responsibility (OBR) (OBR) Responsibility Budget for Office the November In S • the • assessment, autumn OBR’s the of fronts: two on wake now is vulnerable strategy fiscal Government’s the in So, from. come will money this where about questions raises tightening of £15bn further a for need the context, this In markets. debt sovereign of state febrile the given a essential is sustainability on to path clear and control under borrowing public Getting advocate. many that output boost to borrowing government additional the of confidence investor to risks also are there Nevertheless, UK the about investors its debts. handle to ability government’s among concerns raise would slump. economic This continued through happen inevitably will spending public in adjustment the to investment, found private unlock be can way a Unless surpluses. the their invest in to firms market export for incentive little main is there future, foreseeable UK’s the for doldrums the and debt, down pay to seeking households and Government The with that simultaneously. is tackled difficulty be to need these of All growth. productivity sluggish and aggregate capacity; weak supply parts: reduced three demand; has problem growth UK’s The anticipated. previously was hole than fiscal of permanent larger £15bn a fill further to 2016-17 a by tightening for annual need the indicated it consequence, s u U bstantially downgraded the UK’s growth prospects. As a a As prospects. growth UK’s the downgraded bstantially MMARY MMARY they have decided to wait until shortly before a general general a before shortly until wait to decided they have since is weakened after 2015 credibility reduction deficit it; and boost to strategy no apparent is there yet deficit, the to cut plans on greater pressure putting poor, increasingly are growth for the prospects 5 5

SMF SMF boost the economy without borrowing more? The inevitability inevitability The more? borrowing without economy the boost to done be can what question: narrower the to itself restricts instead but discussion that on additional, view a take not does deliberately whether paper This viable. around and/or necessary is stimulus fiscal debates unfunded legitimate are There policy. microeconomic judicious through simultaneously three all achieve to possible is it cuts, of speed or size the than rather taxation, and focusing spending the of by composition the on reality, more In incompatible. three are above the out that set implies goals debate simplified and polarised This policies. between enormously varies used, and is money public how on depends growth future its and of output level the on policy fiscal of impact the the for reality, In damaging economy. or in beneficial changes equally as all taxes treating or and spending output, to do will aggregate in over-simplified, and spending’ less or ‘more impact polarised what like questions on focusing highly is debate growth The debate three. all to achieve strategy a political out paper sets and them between This synergies the highlights current goals. instead these between The trade-offs the prosperity. emphasises long-term for economy the of potential growth the expand must it third and deficit- Government’s the now; output strengthen economic boost must it second credibility; cutting must plan the First, a out set Budget. the at forthcoming goals three achieve will that plan to needs Chancellor the strategy, current the with problems these to response In essential. is finances public of the stewardship careful conditions, economic testing these In e will come from. from. come will l ection to set out where the extra £15bn of tighteni £15bn extra the where set out ection to 6 6 n g o capital budget to around £63bn in that year, just short of the the of short just year, that in £63bn around to budget capital the return would 2012-13 from spending capital infrastructure into measures such through raised year per £15bn Recycling • • • • • include: These tightening. required the of majority vast the for account growth-friendly specific would which five and criteria, these fit that measures for consolidation case the makes paper This • • • existing within strategy growth should: Government The plans. borrowing potent a for opportunity f frhr 1b o ficl iheig y 061 cre 2016-17 by tightening fiscal of £15bn further a £1bn annually. annually. £1bn around saving 60s, over the for travel bus free Scrapping year. per 1.7bn saving pensioners, better-off to TV licenses and free Payments Fuel Winter Cutting year. each £2.4bn saving some credits system, tax existing the into Child Benefit Rolling year. per around £1bn saving £15,000, at holdings ISA maximum Capping annually. £6.7bn saving around contributions, pension on relief tax rate higher Halving 2012-13. from years four of the each for growth, longer-term and output on impact positive large a with policies temporary to credibly £15bn saved the shifting 2012, April from cuts those Make consumption. their increase to demand to sustain capacity the with households encourage to sector, household UK the within imbalances unblock to policy microeconomic using eye to an Do so with output. economic on impact negative or low have a to known targeting policies now, £15bn required of the sources the Identify 7 7 a e the tes

SMF SMF l fiscal debate as the only viable option. But Osborne’s choice choice choice. Hobson’s a not be need Osborne’s But option. viable only the as debate fiscal the to approaches respective their characterise Opposition the and Government the Both goals. incompatible are confidence investor strengthening and potential, long-run its expanding short-run, the in economy the boosting that position the from starts that debate political damaging a beyond move time It’s £10,000 to £9.5bn. around cost would which April, from this allowance tax personal the an in than increase effective more unfunded times three be would plan SMF The by year. each £14bn would, to £12bn extra an borrowing 17.5% involve without contrast, to cut but VAT A deficit. Labour, the to by penny a adding suggested rise, VAT 2011 January the of reversal a as large as twice stimulus fiscal a yield would plan SMF the debate, current the of context the in this Putting the reduces substantially and unemployment. of effect scarring companies, by complementary encourages investment households, and firms lowers to investment costs infrastructure since economy the of side supply- the on impact material a have in also would level It that four. year half around and years, three next the of each in £10bn around by output raise would investment capital boost to it using and now £15bn the is finding that estimate to possible it policies, similar of impact the of estimates OBR on Based Budget. 2008 e e i ws lne t b a fr ht er t h ti the at year that for at be to planned was it vel 8 8 me f the of 20 1 2 2 wit In 1 While there are legitimate arguments to be had about the the about had boost and credibility fiscal maintain be to stance fiscal appropriate to arguments legitimate are there While next the election. before well fall The will tightening Review. further this where Spending of 2010 detail the with forward the come will it that of said has Government years three final for the plan spending their to sticking are and immediately, rises is it that feel not tax or savings necessary the of sources the do identify to necessary they that The said dictated. have plans partners pre-existing Coalition than more year per £15bn by policy fiscal tighten to intends Treasury the 2015-16, from years two Over period. Review Spending current the of end the beyond years two further a for consolidation fiscal the extend to plans unspecified out set Chancellor the this, to response In to fail. course on been have would deficit spending current the of part permanent the eliminate to plans Chancellor’s the rises, tax or cuts more without that is result The potential. that of growth of rate slower a and of economy UK the output potential the of assessment OBR’s the in revision a to down put was outlook deteriorating rapidly this part large In this 2012. early in way orderly an of in itself all resolves Eurozone And the in 2013. turmoil into the that terms assumes real in fall to expected are Earnings 8.7%. to rise to set looks now forecast, March inthe fall to projected been having Unemployment, EFO. 2011 the March of time the now at anticipated than lower is 3.5% fully be 2016 to expected in output that report showing The reading, grim (EFO). for Outlook made Fiscal and Economic its released Office for BudgetResponsibility, Economic and Fiscal Outlook(London: HMSO, Patrick Wintour, .

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SMF SMF The economic situation therefore suggests making use use making suggests therefore situation economic The PLAN GROWTH CREDIBLE FISCALLY A 7. DESIGNING firms. of and households on weigh otherwise that costs capable also are - the cut they as economy of the potential long-run the boosting energy cheaper and more trains, capacity, punctual road better – boost investments infrastructure grow. But to may capacity its or economy the of measures output the on effect persistent little stimulus have may they short-run, the some in consumption the While inform also should decision. measures different of impact -term growth- most long The taxation. and spending the public of composition friendly about thinking when account into taken should that demand on impact short-run the only not it’s And microeconomic different of interventions. policy effect multiplier distinguish the to important between it that implies variation Such road. new a building by artery transport major a relieving and school new a building say, be between, effect to multiplier the likely in variation is there category expenditure capital the within a term effects of different forms of spending has important important has spending the within strategy growth potent of a designing for implications forms different of effects term long- the in variation and multiplier inthe variability of idea The policies high-impact to low– from Shift 1– Principle growth. boost and deficit the to cut principles infrastructure. like for expenditure 1 of capital multiplier impact departmental an assumes OBR the contrast, By the of out it take economy. to choose people when triggered only is 21 s HM Treasury, incentives to save is likely to be negative, since negative, be to likely is save to incentives Bu dget 2010 (London: HMSO, 2010), 95. 20 20

the tax break break tax the 21 o Even Even f two two f G Careful reassignment of spending could also have a a have also side. supply the on effects its through could economy spending the of potential the on impact positive permanently of reassignment Careful borrowing. additional any without stimulus substantial be the would effect ones, high with policies to areas multipliers from low resources with reallocating By for. argued that have deregulation some aggressive of benefits mythical mainly on large cash balances rather than seeking to invest. invest. to seeking rather than balances large cash falling major our demand, on in sitting are firms UK that hardly surprising it is markets, export household weakness chronic weak and spending, of government environment an In passively. albeit debt, down paying rise, are too, the households, many on insecurity of employment With surplus GDP. a of 4% running around are Firms imbalances. international of reflection the are that imbalances sectoral domestic of terms in explained be can problem growth UK the above, described As create to order in imbalances investment. private to unlock sufficient demand sustainable domestic tackle to be also raise should to shifts policy fashion of aim mechanical microeconomic the Rather a output. in spending and taxation of composition the changing simply than further go can we But the imbalances sectoral unblock to policy Use 2– Principle through cut therefore different of debate. polarised can effect multiplier policies the microeconomic of view aggregated a less Taking ones. multiplier high to policies multiplier low from spending reallocate to plans borrowing existing Government’s the within growth-enhancing be therefore would it to that agree able be should debate the of sides both reduction, deficit the of on pace the on that view one’s of than Regardless it. funds higher that measure be to needs simply spending that of effect multiplier capital the worthwhile, be to projects in infrastructure investment public-private or public, additional For o vernment’s existing deficit plans – and one that doe that one and – plans deficit existing vernment’s 21 21 s n’t rely rely n’t

SMF SMF 23 23 22 22 the eve the of crisisthe strongly correlated with age. age. with correlated strongly W board. the across weak so be not need demand household But 90th percentile jumping by around £17,000 to almost almost to £17,000 around by £59,000. jumping percentile 90th the at those of wealth financial with position their contrast, cemented by the households, wealthiest at The 2005, boom. by the debt of height into further sunk had 2000 in wealth) financial negative (had indebted were who households how shows Survey Panel Household British the of analysis 2005, and 2000 between years the this. In supports crisis to the run-up the in households UK for behaviour savings varying the of Evidence this exploit to blunt growth. of sustainable pursuit in the variation too are average that as households policies all uniform treat Yet a finances. (from sustainable entirely action with of course right the households other many there are perspective), macroeconomic is debt down paying Chart 1: Net financial wealthNetfinancial 1: 2000Chartdistribution, to2005 Ibid,14 ThomasCrossley and Cormac O’Dea, h ile there are many over-indebted households for whom whom for households over-indebted many are there ile 22 h hgl see dsrbto o wat i also is wealth of distribution skewed highly The , , (London:Institute Fiscal for Studies, 2010), 14. 22 22 Th e wealth and saving UKof families on 23

8.

the process. the process. in investment sector private and spending consumer in revival balanced and sustainable a encouraging 2015-16, from to 2012-13 years four for investment infrastructure into multipliers fiscal negative or low with areas from away switched households political be should better-off without for tax-breaks 2016-17 and Spending by difficulty. wound-down easily are savings that The measures growth. output-boosting weak to reallocated such be therefore of should year a in economy the of out demand of £15bn take to unwise be would it course, Of the implement and out set to Budget. 2012 in the measures necessary sense makes it shirked, be might would election decisions necessary but tough imminent that chance the increase an that worry would markets since the and years, three another for cuts these withholding by attendant gained be to the little is there and since But inevitable. people is pain political of These variety 2016-17. a by affect will required measures tightening fiscal of £15bn of the sources the imminently announcing by enhanced be greatly would Credibility opportunity. an presents also credibility deficit-cutting to threat the 2016-17, by consolidation of £15bn additional an undertaking to committed Government the With to answer growth. sustainable and investment corporate unlocking the of part hold approaches reinforcing mutually these Combined, boost growth. long-term to will contribute high- and output investment to infrastructure low- like from activities shift multiplier spending and tax government A firms. UK for demand sustainable create to help will households better-off among consumption boost and savings the reduce whos those and cutting deficit prioritise who those between ground common of area substantial a to point they Yet debate. political polarised simplified and current the in overlooked are principles two These

PUTTING IT ALL TOGETHER TOGETHER ALL IT PUTTING first concern is growth. Policies that that Policies growth. is concern first e 23 23

SMF SMF GR better BOOST AND DEFICIT THE TO CUT 9. FIVE MEASURES be may there and measures of alternatives. set specific any on dependent not is paper this of argument core the However, principles. above the fit that measures around consolidation of £12.8bn identifies section following the illustration, of way By 10. in Section impact possible of the the scale estimate on We substantial. impact be would period positive the through output the and plans reduction deficit existing R taxpayers last year. last taxpayers of 11.5% just representing despite giveaway, £30bn the of 60% higher and relief from generous benefit taxpayers rate additional and more higher rates, savings of result a As pound. match per 66p strong effective an relatively is relief a tax in save income position, large financial to and by likely are more who and much regardless, are who taxpayers, higher-rate For saving. pension of pound each for match 25p a them offers to be at in the 2008 Budget. 2008 the in at be to to budget planned was it level the of short just year, that capital in £63bn around the return would 2012-13 from spending Currently savers are entitled to tax relief on pension pension on £30bn. relief over at estimated was 2009-10 in tax pensions private for relief tax to entitled net total The tax. income of rate marginal their at contributions are savers Currently Cut 24 26 25 ww e HM Treasury, HM Revenue and Customs, “Income liabilities tax statistics”, ( Pensions PolicyInstitute, yln £5n e ya o cret pnig no cap into spending current of year per £15bn cycling w.hmrc.gov.uk/stats/income_tax/liabilities-january2011.pdf O higher rate income tax relief on pensions saving saving pensions on relief tax income rate higher WTH WTH 25 For basic rate taxpayers, income tax relief effectively effectively relief tax income taxpayers, rate basic For Bu dget 2008 26

Pe (London: HMSO, 2008), 184. nsion Factsnsion 24 24 24 All of this could be done within within done be could this of All (London:PPI, 2011), 14. ), 15. ), http:// i tal tal to save rather than consume. Clearly we face the opposite opposite the face we Clearly consume. than rather save to were people getting by economy overheating an of out cash take to TESSAs 1999. in specifically in1990, Chancellor when Major, John by introduced (TESSAs) Tax-Exempt Accounts of Savings place Special the took Accounts Savings Individual ISACap holdings B significant behavioural effect on savings decisions. savings on effect in behavioural significant a year had change the per if more save £6.7bn could it although around state, steady save would measure full the This on relief sum. rate basic claiming to equivalent be would which subscriptions, pension beannual their of 75% on could relief rate marginal this claim to terms, taxpayers rate practical higher allowing In by achieved 20%. at savers rate basic of that with line into savers rate higher by made contributions pension on relief tax bring therefore should Government The the demand. from domestic support also would position financial demand drains it strong relatively a in households at cut the Targeting since economy. cut, that be policy urgently contractionary should of kind the precisely is economy the of out cash take people when out pays only that measure a on spending for Government compelling. more even is argument so doing growth the grounds, fairness distributional on re taxpayers. Pensions Institute, Policy 27 p on relief tax rate higher Halve u Author’s calculations.Value netof pensions tax lessrelief, employers’ NICs lief, multiplied lief, by proportionthe of taxreliefreceived byhigher rate e t while there are sound reasons for reducing this t this reducing for reasons sound are there while t nsion contributions contributions nsion Pension Facts 25 25 Annual saving: £6.7bn £6.7bn Annual saving: (London:PPI, 2011). 27

a x break break x

SMF SMF ( 29 HM 28 to rise once interest rates normalise. rates once interest to rise sure is and 2010-11 in £2.1bn at estimated was funds these on t them with and rise, to continue limits ISA Yet today. problem and imbalances. household domestic reinforces economy the from demand drains that better-off the to give-away expensive an therefore are ISAs Unlimited more. yet save than rather it use to encourage spending be should who headroom, with households the precisely – savings free tax in £15,000 than more with people by held are funds ISA of thirds two- around that suggest HMRC from statistics ISA latest The 32%. of rise a – £385bn to funds ISA of value total market the taking ISAs, in saved been has more £100bn almost some disquiet because it is possible that couples on a a could on year per couples £85,000 around that to possible up of is income combined it because disquiet some caused has This year. per £2.5bn around saving Benefit, Child for eligible be to cease 2013, will taxpayer rate higher from a with families that announced Chancellor the 2010 October In system credits tax the into Benefit Child Roll of £1bn. order in the be to saving medium-term assume the therefore we normalise, rates interest once rise would saving would this that likely seems It costings. person current on £800m around save per £15,000 the at capping holding ISA that free estimate tax to maximum possible is it person, each by held savings to proportion in accrues relief tax that Assuming http://www.hmrc.gov.uk/stats/tax_expenditures/table1-5.pdf Cap ISA holdings at £15,000 £15,000 at holdings Cap ISA h HMRC, “Estimated costs of principalthe expenditure tax and structural reliefs”, HM Revenue and Customs, “IndividualSavings Account Statistics” (London: e stock of savings. In the three years from 2008 to 2011, 2011, to 2008 from years three the In savings. of stock e RC, RC, 2011). 26 26 29

Annual saving: £1bn £1bn Annual saving: ). ). 28 Tax relief relief Tax FamilyElement. 20 31 30 Street Journal, ben co be unenforceable. may cut Benefit Child the the individualised, since is system that tax income concerns are there Finally, point. that around earnings with people for incentives perverse creates threshold rate higher the at benefit entire the the of withdrawal more, immediate What’s it. lose would year per £43,000 around just further cut entitlement for any family in the top half of the the of half top the year. per £2.4bn around saving distribution, income in family any for would entitlement system cut Credit) further Universal the 2014, from (and, credits tax the into Benefit Child rolling effect, In minimised. be would incentives perverse higher and benefits; with current in more families get would that basis. the incomes risk no income unlike be would household nothing, there proposals; a cost on would and Implementation fairly more means-testing benefit existing the child allocate to use system credits tax the by provided mechanism should Government The one and plans. current than required, further goes that is solution better a that suggest proposal sustain and current the imbalances of difficulties administrative the However, household demand. unwind to help not do families better-off to transfers again, Once for economy. the into importantly more way its perhaps find not will them to given money the of much growth, and, affordable, longer no are families affluent more to Give-aways earners. higher from Benefit Child to savings for look to right was Government The Iain Martin, “Childbenefit cut ‘unenforceable’,Treasury in aflap”, ValueChildof Benefitless planned savings on higher rate taxpayers from 13,less spending on currenttax credit claimants receiving more than the n efit-cut-unenforceable-treasury-in-a-flap/ e Roll Child Benefit into the the into Child Benefit Roll tinue to receive the benefits, while a single-earne a while benefits, the receive to tinue x isting tax credits system system credits isting tax October28, 2010)( 30

http://blogs.wsj.com/iainmartin/2010/10/28/child- ) ) 27 27 Annual saving: £2.4bn £2.4bn Annual saving: 31

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SMF SMF g pol ae en txd o a fr hi Wne Fuel Winter ones. younger poorer, their than more money receive for pay to should pensioners wealthier older, why clear it is Nor taxed Payments. being are people age in working well-off group less why about questions age raises which society, wealthiest the far by are pensioners Better-off C likely to save income than are poorer pensioners. poorer are than income to save likely more substantially are the particular, otherwise. in into pensioners, suggests High-income getting evidence cash high the the a Unfortunately, of economy. have most would with pensioners effect, to multiplier give-aways like would it basis, seem this On lives. their of end the towards wealth retirement in accumulated any spending start and saving stop people should that suggests hypothesis savings lifecycle The of fairness. grounds theon second, and the windfall, of value the spend than rather save to likely are recipients these that first reasons: two for pensioners well-off to go to money energy rising of the for defensible longer no is it cost principle, in admirable is prices the from elderly the protecting While licences for the over-75s cost around a further £600m each each £600m TV further year. a Free around cost money. over-75s the the for from licences benefit pensioners million nine Some year. this £2.1bn than more is policy the of cost The 60. over those for £200 and 80 over those for £300 rates: two has currently payment basic The homes. their heat to afford them help to pensioners to made is payment fuel winter annual The pensioners poorest an 33 32 re NaomiFinch and Kemp,Peter “Whichpensioners don’t spend their income Department for Workand Pensions, “Benefitexpenditure tables”,( u search.dwp.gov.uk/asd/asd4/medium_term.asp0 dwhy?”,(London: Department andfor Work Pensions,2006),24-5. t Winter Fuel Payments and free TV licenses to all all to TV licenses free and Payments Fuel Winter t 32

28 28 ). ). 33

b http:// ut ut F be now scrapped. should policy The long-run. the in spending this for priorities higher are there that and money this for uses growth-enhancing that more are there is however, clear, is What revenue. transport lost any reimburses for providers effectively state the since is, spending 1n e year. per £1bn around cost to estimated now is perk This 60. of age the over those for travel bus free funded has Exchequer the 2008, Since 60s over the for travel Axe free the per year. safeguard would change £1.7bn around saving pensioners, vulnerable this most and poorest 2010, receiving in couples credit and pension individuals million 3.35 With Credit. Pension the on pensioners to restricted be should licenses TV re 34 spec 35 o the for travel bus free Scrap a Fuel Payments Cut Winter off pensioners off pensioners o Assumes that savings arein proportion proportionto the of PensionCredit Department Transport, for http://www.dft.gov.uk/consultations/closed/ cipients in pensionerthe population. v n r these reasons, eligibility for Winter Fuel Paymen Fuel Winter for eligibility reasons, these r er 60s er 60s d free TV licenses to better- to TV licenses d free ialgrantfunding/consultationqa.pdf. 34 34 35 t s nla wa te utpir ffc o this of effect multiplier the what unclear is It Annual saving: £1bn £1bn Annual saving: 29 29 Annual saving: £1.7bn £1.7bn Annual saving: t s and free free and s

SMF SMF 36 InfrastructureUK,2011), 131. Al 1

more than just a temporary increase in the level of economic economic of level the in increase be temporary a just would than more demand to boost sustained this of effect the But and tax if case the be would configuration. current in their remained spending than 2014-15 from year to each 2012-13 in larger 0.7% This around year. economy would each an in implies investment £10bn around capital by output boost raise therefore to above outlined which are) of category (most savings latter of of £15bn the the Using £1 to £0.70. be former switching would the from from GDP taxes in or change spending the basis, this On to 1. of multiplier carries a contrast, boost by A expenditure, 0.3. capital as departmental change government a such OBR for The multiplier allowance. the personal gives the via taxation in change a spending and of conservative that approximate tax most at use might together, the taken measures, to of fair multiplier is impact it The estimates. latter the into taxation and spending switching of effect stimulus the quantifying in But, output. on effect positive strong a have areto liable plan infrastructure national Government’s in outlined projects infrastructure the contrast, By negative. be to likely spending is policies these on multiplier fiscal The . more save to society deployed currently are identified rises tax and savings possible the of half around Moreover, the demand. aggregate with support to headroom those greatest and money, the save to propensity highest the with those – groups high-income or middle for, breaks tax HM Treasury, 0 mo . QUANTIFYING THE STIMULUS EFFECT EFFECT STIMULUS THE QUANTIFYING . st all of the above policies transfer money to, or provide provide or to, money transfer policies above the of all st Na tional Infrastructure Plan actively encouraging the wealthiest people in in people wealthiest the encouraging actively 30 30 (London:HM Treasuryand 36 36 achieve the pledge from this April – a move that would cost cost year. per £9.5bn would that move a – April this from to pledge allowance the achieve tax personal the in increase unfunded an than effective more times three be would plan SMF The parliament. to committed is the Coalition of end the by £10,000 to allowance The tax personal the raising year. each £14bn to £12bn 17.5% extra an to borrowing involve plan, cut SMF the to VAT contrast in would, A 0.35. be to multiplier VAT the estimates dig pny o h deficit. the to penny a adding as without large but rise, VAT as 2011 January the reverse to twice plan Labour’s stimulus fiscal a yield would plan SMF The debate? stimulus fiscal the in feature currently that ideas other the package to compare stimulus this does how but numbers, big are These • • • activity. It would positively affect the supply side of the the of side supply the affect e positively would It activity. th 37 co This assumes thatthereis nointer-temporal substitution consumptionof at couldat occur with atemporary VAT cut. nomy in three ways. ways. in three nomy of higher employment. employment. of higher benefits social and personal unquantifiable the mention to not prosperity, long-run for implications with positive capital, employers’ and skills of workers’ deterioration the prevent therefore would It of thousands. hundreds not if tens by period, the throughout unemployment lower substantially would output higher Third, firms. by investment complementary - ‘crowd-in’ or – encourage would boost infrastructure Second, the households. and firms for costs cutting by potential productive enhancing permanently stock, the capital to add directly would the plan from consumption, away and investment infrastructure into spending switching by above, mentioned First, as 37 This is because the OBR OBR the because is This 31 31

SMF SMF 1 u te at ht diinl osldto fo 21 is 2015 from growth. long-term strengthening and output stimulating consolidation for opportunities new additional up opens also that unavoidable fact the But implemented. be must be measures to new have the before will soon, decisions made tough more that means this of All economy. the of potential run growth of long- the expand year and demand; per aggregate stimulate £15bn tightening; further a reduction for need the deficit of to light strengthen in needs credibility urgently: Chancellor things the three Budget, 2012 achieve the in strategy the refreshing In consolidation. fiscal further unspecified yet as for need the and growth expected than weaker both from pressure under come has plan reduction deficit 2010 Government’s The respective approaches to the fiscal debate as the only viable viable only choice. Hobson’s a not be need choice Osborne’s option. But the as debate fiscal the their to characterise approaches respective Opposition the and Government the Both exclusive. mutually are goals and three these that position the from starts that debate potential, political damaging a beyond move time long-run It’s its expanding confidence. investor strengthening short-run, the in economy the boosting policy: economic UK of goals headline three the of each further unambiguously would these as such measures of combination A potential. productive their and increase invest encouraging to them encourage to businesses – for costs cutting imbalances and - sectoral save than rather spend to by finances sound with households strategy growth domestic a such achieve resolving to possible is it insight, microeconomic with strategy marcoeconomic the informing By demand- most the into available. projects promoting growth long-run and boosting ploughed years’ be four The then 2015. should to savings waiting than rather now, them cut and policies low-growth pick to be would policy responsible the inevitable, is reduction deficit further of pain political the Since 1 . CONCLUSION CONCLUSION . 32 32 RESPONSES TO very difficult to reverse. Just because the fiscal crisis has not not fiscal crisishas because very difficult to reverse. Just the of chance a prove could greater fiscal crisiswhich ultimately right,is however,tosuggest that it would alsoinvolvea Chancellor The this. deny to be wrong would Osborne Mr and Certainly, it would resultinstronger GDP growth for a while, Should fiscal policy beeased in the immediate future? from over. debatein th substantive the if the Tories have won thepolitical debateon borrowing, even which the public would accept at response to the crisis,heknow that he favours amuch more full-blooded Keynesian 1930ssuggest in resultsthe ofausterity about the warnings the government’s strategy. Although Mr Balls’repeated radically different path from th this does not seem sufficient to place the economy on a Chancello Shadow the Meanwhile, as he is often painted. 2015.He asinflexible on the fiscal path is after quite cuts not and vaguelypromised further unspecified public spending accepted the over-run in the bu simply he Instead, GDP growth. ofslowing face inthe year Chancellor did not actually implement that tightening last the it is Ed Balls’,though that noticeable than tightening George Osborne’s rhetoric supports amorerapid fiscal another matter. differencebetwee polemical difference is really as a key represents bedone should this at speed which the great as theaccept that thereis a need polemicsto makeincreasingly polarised. The government and opposition both it seem is hasbecome the debate on UK fiscal policyin political The Response fromGavyn Davies OBE OSBORNE’S CHOICE reduce the budget deficit, deficit, budget but reduce the n theparties.Whetherthe e one which is emerging from e economics profession is far dget deficit in the near term, term, dget deficitin the near s that this is not something 33 present. At leastfor now, r callsforacutin VAT, but

SMF SMF visiting professorattheLondonSchool ofEconomics. an externaladvise Downing Street, servedasaneconomic policyadviserinNo10 2004. Hehasalso from2001- theBBC andwaschairmanof Sachs from1987-2001, was theheadofglobalecon He Partners. ofPrismaCapital co-founder and Asset Management ofFulcrum Gavyn Daviesisamacroeconomistwhonowchairman coalition. from the careful consideration that less important than perhaps are argued, well though plan, Mulheirn the of specifics The long term productivity, without increasing public borrowing. spending activities to impact both aggregate demand and plenty of scope toreshu GDP passes through the hands of the government, there is butchange, aggregatedemandSince almosthalfofUK does. “balanced budget multiplier”. The budget deficit does not use makes plan Mulheirn The control over public debt which itdesires. term long the achieve to government the allowing also while time-limited, this package would temporarily boostGDP, be fairlyspending, where the impact on demand (and supply)might large.on Since demandincrease taxationcut andspendi the infrastructureright. He therefore suggests is small,Ian Mulheirn spending says that relativelysmallthe di while this is would all Soboth politics. practical into rather be al depressing, are opaque,complicated later and verydifficulttotranslate and heversus increased, and hard-to-measure, “tail” risks of a crisis is happen. But the trade-offs between immediate GDP gains happenedyet,this doesnot mean thatit will ever not fferences between them. 34 ffle the government’s tax and omics departmentatGoldman a useful package,a useful which would sidesmakelarge claimsabout r to the British Treasury,andasa r totheBritish of what economists call the ng in areas where the impact so increasinginfrastructure central principle. Itdeserves

hoping to flow from such policies to kick in. the bad memories to fade, and for the benefits you are is going to be about your lastopportunity. That gives time for ofyour 2012 voters – the heartland in unpopular –especially Rule number three: if you are going to do anything really going. gets campaign the before politics say thathe will need underestimate. Whatever the by could outtobe 2016-17,and required that an turn £15bnofannual spending another November, the Office for Budge cycle.Last election in the be to late have made until numberleave two:don’tRule that he must want at arou uncertainty ofmarket kind before the voters made their decision,and could create the fiscal policy loosening this year wouldbeforgottenwell The in2014-15. problems worse his make could that today donothing to is one number Rule them “golden rules”. guided instead by four different principles: we could call So as he prepares next month’s budget, his thinking will be much too optimistic. to out be turned 2015.That run up to in the budgets pleasing roomthat fiscal the create two orthree years offierce that hope was 2010,his in Treasury the movedinto he When approach to this challenge will not be timid. guide, formisany Spring of 2015.And his if past the in victoryelectionrequired towinanoutright be shape thatwill strategist, his priority is to get the economy into the sort of is inthe economic cycle.The George Osborne is at least as interested in the political as he Response from Sir Richard Lambert all costs to avoid. all would be requiredforcrowd- austerity wouldbeenoughto economics might suggest, the any painful measures that may may that measures painful any to address this problem well Conservatives’ key campaign key Conservatives’ nd the time ofthe election 35 t Responsibilitysaid that cuts or tax rises might risesmight be ortax cuts impact of any significant

SMF SMF was editor of the Financial Times from 1991 to 2001. Timesfrom1991to2001. Financial was editorofthe member oftheBank ofEngland’ oftheUniver present Chancellor Sir RichardLambertistheformer himself up for a little budget excitement next month. For all these reasons, Mr Os track when the campaigning seas stick onitsfiscal course,which wi continue to Government will markets that the the convincing without whichthe numbers won’tit means addup.And ahead, years the in growth economic of measure reasonable But credibility requires two other qualities as well.It needs a probable. further spending review next being ready to tighten furthe That means sticking to theoverall spending limits – and even Rule number four: retain your and veryinefficient as arevenue raiser. 50p toprate of personal tax, which is both wildly unpopular pill couldbesweetenedby doi to have little impact on dema trimmed, now is thetime - especially ifsuchchanges are likely So ifbenefits for better-off taxpayers are ever going to be 36 s Monetary PolicyCommittee.He s sity of Warwick, and aformer and ofWarwick, sity Director-General oftheCBI, nd in the economy. Maybe the Maybe economy. in the nd borne could just begearing r ifnecessary.That’s why a hard-won policy credibility. hard-won ng something bold with the the boldwith ng something year already looks quite ll be hard to do if it is not on on starts to draw close.

thing”, but there may not be enou spend it constructively. Infrastructure is undoubtedly “a good to how out isworking that revenue, and of billion £15 raising than tougher onething only is there’s that point My second nation’s best damageBut toanything. otherwis limited measures that could boost growth without long term I’m happyif macro-economists want to devisesome time- expediency. the principles of efficient may or may not be justified, thatshould be determined on gain. Forexample, whileabolishi We should avoid making long term mistakes for short term tax system is paved with good macro-economic intentions. illogical and a to messy road the Alas, goal. economic noble) closer scrutiny. He has selected from benefit might they Ithink but thought, proposals much £15billion raising of revenue. First, I’mratherscepticalof I have just three points to add. stimulatinginfrastructure. parliament, and spend the money now on growth yet bedevisedto for have next measures that the austerity of £15billion youbringforward “wheeze” that his I like plan. the fiscal sticking to amount it spends, in order tostimulate demand while think about and growth. Ian is right tosuggest that we might usefully polarised argumentwe’re between having credibility fiscal At last. A paper onfiscal poli Response fromEvan Davis micro how government spends rather than just the the just than rather spends government -economists to work on tax and benefits. cy that tries to breakdown the tax systems not short short term tax systems not Ian’s specific suggestions for I haven’t given eachofhis given I haven’t ng higher ratepension relief them to suit his themto(perfectly 37 gh shovel-ready projects to e, I’dprefer us to get the

SMF SMF Evan is writing here inapersonalcapacity here Evan iswriting Studies andthe London BusinessSchool. He previouslyworked asanecon economics correspondentfrom1993. ageneral to2001andas from 1997 for BBCTwo'sNewsnight BBC's economics editor.Beforehispr programme inApril2008followingas thepresente Evan Davisjoined sooner orlater anyway. promotes thesupply- obviously flat-lining, itis far betterif the spendingitself isso economy the when tobehelpful bound is economy The point isthatthe while pr huge contribution. industrial economyweneedbe makingbuildto a would few billion pounds worth ofIan’s money topromote the new such tough times. Whoever can identify a place to invest a the tradeableinisbuild up why weare toany degree.That facing austerity. What we havesingularly failed to do so far is tradeable sector,like governmen tradeable sector.We also know exports orsubstitutes forimport build up the tradeable sector of our economy (the part that need toexportmoreandimport strivingnationmakeis at the moment. to knowthat We we could find ways of facilitating the economic transition the government UK if to the beneficial beenormously would My thirdpoint – again on the how-to-spend-it issue –isthat it preferably on the Chancellor’s deskassoon aspossible. frontmoneyspend thatneeded,on. Moreworkonthat is and side changes that have to be made 38 r teamonBBCRadio 4’sToday omist at the Institute ofFiscal omist attheInstitute omoting extra spending in the s) at the expense of the non-at theexpenseof the s) less andtoless that end have to that industries in the non- omotion to editor, Evan worked omotion toeditor,Evanworked t services and retailingare ix-and-a-half yearstintasthe

of thestory. Sothe rapid action on VAT, home repossessions, a bit tells only efforts previous of analysis Econometric done. depends on depends on the circum not or it works Whether well. as confidence influence my mind the fact that active government is trying to simplistic The multiplier calcul today. consumerbehaviour. on effects that could be done fast and could did have positive would be reversed as we pre-announced it), was something government. AsharpVATtax cut (andone thatpeople knew New Labour did in response to the recession when in need for fast action, easily delivered, laybehind some of what stimulus beimplemented and Of course other factors also co some ofthenewlycreated demandismet fromimports. industrial sector. Other forms of stimulus also leak abroad as of the bulk the from investment more induce not and corporation tax cuts may only improvethe profits of banks people save the sudden windfall and don’t spend it all, while task since most of the poor do not pay tax), get diluted as impact of income taxcuts, unless directed at thepoor (a hard achieving a fiscal boost might ways of different why reasons theoretical good are There that’s largely been overlooked untilnow. changes. So thisis an important new angle to the debate for infrastructure ismuch higher than that forcertain tax about the medium to long term) (which isalmost always,asRobert Chote often tellsus,wrong consensus to as close cantothe who stick tend as they expenditure varygreatly.As Ia the fiscal isclearthat It Response fromDan Corry stances, thetone, impact of different formsimpact ofdifferent of ation in any case misses out to n points out, even the OBR – me into play. Howfarcan the how quicklyit work? Thewill Thesameargumentapplies - believethat themultiplier - have different effects. The effects. have different 39 and the way it is

SMF SMF happened. point becausepeople think the good positive return cannot be added to the economy at this nece where situation crazy a in truth clear – at least in the short term. But in any case we are look progressive but their impact on overall demand is not in Some suggests. look afirst as enhancing welfare obviously alllook they politically cha spending byreducing current spend. I will leavehim to that – Ian suggests several ways of releasing room for capital toit). up not have been scrappedand their re city regions (since the obviou major potto the increased an give Maybe through. it pushing there isas much asIan hopes andWhitehall isnot great at were advanced.accelerations. And some roads andotherbits ofinfrastructure MoreIt applied to some of the Building Schools for the Future of thisdevelopments that had stalled due to the crash going again. is surely housing get policyto Start’ ‘Kick the laybehind cash. This was possiblehad already had been achieved and where the only restraint but Ithinking about what was wanted, where planning permission doubt 2008-10we movedfast where there In already was a lotof are alwaystime delays that canbe substantial. ‘shovelready’projec But having productiv the addsto investment anyway and good are multipliers The of this. more for And then we come to capital spend. Ian istotally right to look underestimated. be -cannot economy real onthe hence behaviour, - confidence hence on Those effects cope forthemselves. government was not going to standby andleave everyone to business failures and the ilk 40 llenging and allbe may not llenging as a s delivery mechanism the RDAs the s delivery mechanism wereaimed atshowing the ssary capitalspending with a ts ready is not easy, so there placement the LEPs, are just markets would panic if that that if panic would markets e capacity ofthe economy. personal capacity hereina writing Capitalandis currently CEOofNewPhilanthropy former Treasuryan Dan Corryisa pessimists think. growth and that the output gap is not assmall as the secure the economy fiscalpolicywillhelp more sensible approach assuming they are right. I continue to think that a necessarily believe the OBR numbers, he does base his Finally although in an aside Iansays that he does not b a School of Economics & Politic School ofEconomics Growth, Productivity and Jobs’, Cent Jobs’, and Productivity Growth, constraint that this paper imposes is not the best way to go. the fiscalpolicy,accepting through low kept unnecessarily ,JohnWiley&Sons Issue, Ocotber2011 Market, State and Society under Blair andBrown”, Political Quarterly Special Labour: New “Reassessing (eds.) Michael Kenny, and Patrick Diamond, Dan Corry DanCorry

Corry D, Valero A and van Reenen J, and van Corry D,ValeroA Labour and the Economy, 1997-201 and theEconomy, Labour b isbeing For believethatgrowth those who al Science, November 2011 re for Economic Pe re forEconomic ‘UK Economic Performance since 1997: since1997: Performance Economic ‘UK d Downing Streetadviser.He is 41 0: More than a Faustian Pact aFaustian More than 0: rformance, London in

SMF SMF years. to three one next the over materially investment raising on deficit reduction caused by thesluggish economy and focus deficit envelop. Iwould prefer to acceptaslowerrate of an unchanged within expenditures tax termby short altering the in consumption private to difference amaterial make to can be preciseenough management macroeconomic term interest rates. MoreoverI worse debt/deficit situations than the UK and lower long- both have States the United and isexcessive.Japan vigilantes he expresses about an imminent revolt by thebond-market credible plan of deficit reduction but the degree of concern is accordingly. Mr Mulheirn takes time but the pace of deficit reduction can be adjusted It canbeprotested that stimulating or organising investment like, but on raising investment. consumption therefore, let households save asmuchthey European neighbours.Effort shou investment levelsobserved in the more vigorous of our economy as a whole does notsave enough to finance the reti own their cover to enough seems clear, however, thatBritish households do notsave expendituredecisionsorder in to encourage consumption. It saving in the private sector and is concerned to tailor taxor placeheseems excess to beconcerned about first In the his answers. Mulheirn that this is a good question, I do not agree with all Ian with I agree While economies? brunt of necessary the protectedorexpanded andwhichothers bear musttherefore be soshould and term short long and inthe growth promote content of the deficit. Which pu the consider to and it, reduce and try to how fast or deficit It is valuable to step away from the debate about howResponse fromGerald Holtham much 42 right that there must bea there must that right do not believe in any casethat do notbelieveinany rement requirements andthe blic expenditures are likely to ld not be directed atraising comprehension that the Treasury postpones the operation of per cent implied by ta percentage points at most of the capital value, not the 100 infrastructure projects riskisgenerally low, the a of handful and put on the government’s balancesheet. For shareholno privateif thereare the business. Certainly the tax payer has a contingent liability companiesbe private whichwill charges are nodifferentin principle from theborrowing of bank,likecorporations, agreen burden onfuture tax payers is th government deficit,for it shouldbetarget civilizedgeneral the world. Thefiscal of the in accounting practice to bring the UK into line with the rest State enterprise of that kind would befacilitated by a change taxpayer? proceeds with suppliersin order to defray costs to the suppliers, effectively increasing solar panelswhy increase not suppliers. Insteadofreducing guaranteesforgovernment, withorwithout‘green’ price producers attheinterestra fabled green investment bank tostartlending toenergy produce a revenue stream. And it could enfranchise the investment spending rapidly on own its couldincrease government The go-ahead. the given onpreparations immediately spent be would money electricity prices. The scheme electricity needs if the UK pound schemetosupply 5 pe consortium would buildthe Severnbarrage, amulti-billion undertake given an element of plenty of large projects that the private sector is ready to investment inprovision the of This canbedoneby amassiv rgeting the PSBR as at present. It defies governmentwouldguarantee at which represents acall and a would be long in gestation but thebusiness ders but thatcanbe assessed e increase in tes available to the British tes availableto the marketed services. There are the subsidy for installation subsidyforinstallation of the . Theborrowing of state which are financed from user it and put a levy on the the alevyon put and it state sponsorship. A privatesponsorship. A state financed by therevenues of 43 things like things toll roads,that r cent of the UK’s total and sharing the the sharing and state-sponsored

SMF SMF allowance. would not claim it. The same would apply to winter fuel the concession was worth less th well-to-do would pay much of it back. Anyone whose use of taxed as income. Poorer pensioners would be unaffected; the any area ca valuein annual its example, free thembus travelforelderly isaboon tothe but abolishing them, why not subject them all to taxation? For or benefits testing means rather than afootnote: Finally, the general government deficit. than fiscal target rather make the illogical practices PSBR the and archaic our and borrowing sector public to add would forseveral GreenBank year the Brookings Institution, Washington DC. DC. Washington Brookings Institution, Fellow ofMagdalen College, Oxfo OECD.Hispreviousacademic Department ofthe positions include and asheadoftheGeneralEcono He hasworkedonpublicpolicyissues Brothers, London. Management (nowAvivaInvestors) boutique. HeisaformerChiefInve management LLP,afund Capital ofCadwyn Partner Managing Gerald Holthamisvisitingprofes 44 sor at Cardiff BusinessSchooland atCardiff sor rd, andVisitingFellowofthe mics DivisionintheEconomics n be assessed and it should be stment Officer of MorleyFund stment Officer and chief economist at Lehman andchiefeconomistatLehman s because itscapitalisation asaformer director ofIPPR an the tax billit incurred