But it is the Liberal Democrats who have gone the furthest, and the earliest. At the party’s recent conference an existing pledge to cut the basic rate of income tax by four pence in the pound (paid for by green taxes and closing loopholes) was extended by Nick Clegg, their leader. He wants to make savings in public spending and use some of it to cut taxes further.
However much it jars with the recent history of the tax debate in Britain, the emergence of a consensus for tax cuts was becoming inevitable. Bad economic news abounds: figures released on November 12th showed unemployment at 1.8m—a quarterly rise of 140,000 and the highest since 1997. Comparable economies, such as Germany and America, are planning tax cuts of their own. The monetary lever cannot be pulled much more furiously than it has been (the Bank of England slashed the base rate of interest by one and a half percentage points on November 6th and will probably cut more) but banks’ unwillingness to lend has gummed up the transmission of lower rates to borrowers. Experts have given fiscal stimulus the nod, including Mervyn King, the bank’s governor, who offered qualified support this week.
But underlying the consensus on the need to cut taxes is profound disagreement on just how it should be done. Both opposition parties worry that extra borrowing could threaten an economic recovery by pushing up long-term interest rates and requiring sharp tax rises in later years. Mr Brown retorts that a funded tax cut is not a stimulus, and that his efforts to pay down the public debt while he was at the Treasury mean that Britain can safely borrow.
If Labour is alone among the political parties in how it proposes to pay for a tax cut, the Tories may end up equally isolated on the question of whom the cuts should be aimed at. The Lib Dems’ ideas, as well as those favoured by the government, are designed to stimulate demand by boosting incomes that have been squeezed recently. The Tories’ focus is on staving off job losses by easing the cashflow of employers.
The impact of the government’s plan on the economy will take time to gauge, and, if the recession is over by the time the next election is called (which cannot be later than June 2010), the Tories’ ideas may never be tested. Yet the political winners and losers may emerge more quickly.
For Mr Brown, a successful G20 and PBR would accelerate the momentum he has gained from his handling of the economic crisis and Labour’s surprisingly comfortable by-election victory in Glenrothes on November 6th. But his rhetoric has raised the stakes. As he has promised to be radical in boosting demand, anything less than a big tax cut may fall flat. Already the government has had to cool speculation that a £15 billion ($23 billion) cut is in the pipeline, after Robert Chote, director of the Institute for Fiscal Studies, a think-tank, said such a sum might be required.
The Tories are also poised precariously. If their targeted and funded tax cuts prove wiser in the long-term than more eye-catching alternatives, it may transform the current reputation of George Osborne as a shadow chancellor given more to political tactics than to economic strategy. But with Labour doing less badly in the polls, the Tories may not be able to spurn chances for short-term glory. Business is hardly ablaze with enthusiasm for their NI proposal, and much of the party longs for bigger cuts.
What makes the emerging battle all the more gripping is that the protagonists are defending positions contrary to their recent instincts. Mr Brown, whose self-styled prudence led him to deplore Tory tax-cut pledges for a decade, boasts about taking Britain deeper into the red to leaven a recession. The Tories, natural tax-cutters, are now the chastening voice of fiscal rectitude—to the bafflement of many. And the Lib Dems, with their left-wing base, are promising some of the biggest direct tax cuts since Margaret Thatcher. Recessions make politicians do funny things.
The taxation policies that the British government has been applying in previous years, has increasingly become a theme of discussion amongst the varied political parties of the country. The imminent impacts of the global economic recession, has developed motivation for politicians to think on tax-cutting platforms as a pragmatic need to stimulate a decaying economy. Even though the way in which this has thought to be done and whom the cuts should be aimed at, is largely argued by the major parties of the country, a tax cut has been considered an inevitable mean of response to the economic crisis.
The Conservative faction of the government announced in relation to their plans on tax cuts, their interest on applying supply side policies to foment production. This plan is projected to generate firm’s cost savings by giving a systematic relief from the national insurance (NI) contributions and from council taxes. This program intends to reduce unemployment as it will be applied to firms hiring unemployed workers, as well as to increase production and real Gross Domestic Product (GDP). This governmental action will increase quantity supplied by these firms with the minimization of indirect taxes which will generate a positive shift on the supply function. Graphically we can determine the effects of this plan in figure 1.
Figure 1 – The Conservative’s Plan On Tax Alleviation On The Producer
Supply shifts positively to the right from S1 to S2 as a result of the alleviation of NI and Council taxes for firms. This will hence increase quantity produced from Q1 to Q2 which means there will be higher productivity as a result of the application of the program. With an increase in quantity, firms will be in the necessity of hiring more employees to cope with the production requirements.
In the other hand the Liberal Democrats, favored by the government, are emphatic in the need of boosting consumer expenditure and so tax-cuts on this side of the spectrum are designed for benefiting the consumer. In this way, lower taxes in the form of bigger tax credits, and the abolition of 10% of the income-tax rate will increase disposable income which with the crisis has recently become inferior. In this way this increase in income will stimulate demand so that with bringing forward spending, the economy could continue working at optimum levels thanks to an increase in quantity of products and services. In Figure 2 it is possible to determine how a cut in income taxes will increase disposable income for savings and spending; an increase in demand.
Figure 2 – The Liberal Democrats, And The Government’s Plan On Tax Alleviation On The Consumer
Demand shifts positively from D1 to D2 as a result in the increase in income due to the lower taxes offered by the Liberal Democrats and the government which increase disposable income. This will generate an increase in quantity from Q1 to Q2 but conversely an increase in prices from P1 to P2.
The consent for tax cuts has become unavoidable with the rise on the impacts of the recession. The issue is henceforth, which of the proposed programs is more viable? The economic theory suggests that both are feasible. Nevertheless if the Conservative plans on tax cuts do not offer a long-termed guarantee that ensures that in the future there won’t be sharp increases on taxes as predicted, then, it might not be applicable. And as for the Liberal Democrat Plan, if it doesn’t demonstrate a good control for future rises in inflation derived from a long-term increase in interest rates threatening economic recovery, it can’t be used as a reliable mean. And even though the government has already announced that a cut of about $23 billion is projected as a mean of handling the economic crisis, not knowing which of the plans will be adopted by the government, it is not possible to determine how effective the tax cuts will be as an alternative mean of helping with the economic recovery.
Are government actions through which taxes are imposed.
A fee levied by the government on a particular activity.
It is an institution which buys, organizes and/or hires factors of production to produce and sell goods and services.
It is a form of taxation related to social security benefits in the United Kingdom.
An indicator which measures a nation’s income within its geographic boundaries.
