Sunday, November 23, 2008

Darling heeds Cable

Slowly but surely the Chancellor continues to pay heed to the excellent Mr Vincent Cable. I am not fully enamoured of the financial strategy that it appears will be announced tomorrow to an expectant nation; nevertheless, if today's reports are to be given credence, it will contain elements of fiscal sense, largely borrowed, as has often been Socialist practice, from the Liberal canon.

Mr Darling, it appears, will reduce excise taxes levied on goods and services, known as vat taxes. This is excellent, for such taxes distort trade and consumption. It appears the European concert of nations has sought to make them as fair as "possible" and their imposition carries a great deal more sophistication than a century ago. Nevertheless there are considerable exemptions and distortions.

It is also suggested that the Chancellor will make a promise to increase taxes on those earning the greatest incomes, these taxes to be levied after an election. Such a policy might have been whispered in his ear by Mr Cable; indeed Mr Cable has shouted it from the rooftops. But it will not raise enough now or in the near future to pay for the substantial borrowing that Mr Darling proposes.

The Chancellor will also channel support to the poorest families. It is likely he will use his "tax credit" system. As I have commented in the past, this system involves excessive use of clerks and printed paper forms. Nevertheless it has the present advantage that payments can be increased speedily and directed to those in greatest need faster than reductions in taxes levied on wages. I would still in principle prefer reductions in income tax for working families - as I believe would Mr Cable; for the present policy would mean an increase in government disbursements - and that is not to be desired - rather than a reduction. I would wish to hear Mr Darling espouse such a policy once the immediate crisis has passed.

There remains the question of how much Mr Darling proposes to borrow, whence such borrowings will originate and how they will be repaid. He seems likely to offer a partial answer to the last question but continues to remain ignorant of the risk that increasing borrowing may increase pressure on the banks and on interest rates. He must offer a full explanation of his actions.


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