The IMF say the Chancellor is ‘playing with fire’ by continuing with his policy of temporary tax cuts, spending cuts and infrastructure investment. Labour certainly love this statement as it supports their view that the Government is on the wrong track by cutting too deep too fast.
What I fail to see is what credible plan Labour have in return! All I seem to hear are the same two arguments, raise the top level of tax to 50% and have a temporary reduction in VAT to stimulate consumer spending. But this will not work so why are they saying it.
Raising the top level of tax to 50% will encourage those individuals to move away, and lets face it, if you were the likes of Madonna earning £220m what would you do? Pay 50% tax or move abroad to somewhere like Monaco where the tax is cheaper and the cost of moving and buying a multi-million pound house would still work out cheaper than staying in the UK with its 50% tax rate! Tax revenues would therefore decline making the whole policy a complete and costly waste of time. It is also rather hypocritical of Labour when they say the Government is only interested in giving tax cuts to the wealthy, when they were in government for 13 years and they set the high rate of tax at 40%. They only raised it to 45% in the last 3 weeks of their term, so Labour actually gave the wealthy a 13 year tax break!
The other proposal is a reduction in the VAT, the last time this was done was in 2008 when it was reduced from the then 17½% to 15%. This temporary reduction lasted for just over a year and was at the height of the UKs economic bust. The evidence that this stimulated growth was minimal at best. The reality is that businesses across the UK said it cost them millions in implementing the changes, twice, first the reduction just before Christmas 2008 and then returning back to the normal rate in January 2010 when the Christmas sales were on. The last thing businesses need is to have a change of VAT just prior to their busiest period of the season!
If the policy that the Chancellor is following is so wrong why does it appear to be working? Even though the IMF have reduced our growth forecast to 0.7% the Bank of England had upgraded its forecast for this year to greater than 1%, now expecting a larger than predicted growth and inflation to be back at 2%, the first time since the financial crisis started in 2008.
Compared to the Eurozone, who are going to be in recession for the rest of the year . This is backed by the latest figures from France who are now officially back in recession with rising unemployment. Yes, the UKs unemployment has risen by 17,000, but those claiming benefit has reduced. This implies more people are now back in work, mainly in part time or self employment.
With the Eurozone in such crisis I am surprised that our economic outlook is looking as positive as it is. The EU in/out referendum is gaining weight for the ‘Out’ supporters.
The name, reputation and political future of the Chancellors all rest on his economic plan coming to fruition before the General Election of 2015!