Monday, November 24, 2008

Gordon Brown's Keynesian Experiment

U.K. Prime Minister Gordon Brown says that "the orthodoxy of the last few decades that the global economy could be stimulated using interest rates alone – was over".

That is true, sort of, in the sense that it is becoming increasingly apparent that more of the interest rate manipulations that got us into this crisis won't get us out of it. But the fact that monetary Keynesianism is increasingly discredited does not mean that fiscal Keynesianism is somehow vindicated.

It is one thing to announce tax cuts when you start of with a significant budget surplus, like in Sweden. It is very different to do it when you started of with a budget deficit of 3-4% of GDP at the peak of the cyclical boom, like in the U.K.

As a result, the U.K. budget deficit is likely to reach £80 billion, or nearly 6% of GDP this year. With the crisis deepening, and with Brown's and Alistair Darling's Keynesian package, it will rise far above £100 billion, and approach 10% of GDP. Hadn't it been for the similar situation facing and similar plans by the incoming Obama administration in America, that would have put the U.K. in the not so flattering number one spot in terms of budget deficit.

The most important measure of the package will be a reduction in the Value Added Tax from 17.5% to 15%. In addition, to that there will be some minor targeted tax cuts and increased public works and education spending. At the same time, they say they will plan to raise the top income tax rate from 40% to 45%, something which will bring little if any revenues while eroding the UK's competitiveness, although that will not be implemented until after the next election


Blogger Wille said...

I don't particularly like the 45% top rate increase (which will likely never come into effect, as the tories look like winning the next election, to be held in the next 18 months).

..but, it is likely a symbolic issue rather than anything else, and won't affect almost anyone except banking execs.
Most people making more than £150K, probably do so by virtue of large investment income rather than salaried work, as such it is either taxed at 18% (capital gains), or an effective rate of 22.5% (dividend tax of 32.5%, with a 10% tax credit on all dividends).

My guess is the 45% rate is to defuse tory criticism of unfunded cuts in the eyes of the public, and appeasing unions and Labour grassroots, without actually doing much at all about competitiveness.

Nonetheless, looks like I'll be moving more of my liquid assets out of the pound..

4:10 PM  
Blogger Wille said...

The real gem of the "real" pre-budget report is the 0.5% increase in National Insurance contributions.

They are effectively increasing income tax on everyone by 0.5%, as NI is an income tax.

"Go stimulus!"

Ineffectual and counterproductive tinkering is what this prebudget report is filled with, increasing tax burden and increasing administrative overhead for companies and authorities alike.

5:37 PM  
Anonymous Anonymous said...

Aparently, Lord Keynes is still alive & kicking!


2:27 PM  

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