Balls the tax-cutter?
Fraser Nelson 12:46pm
‘Balls urges tax cuts’, we’re told. Has he had a Damascene moment? Has the borrowed penny dropped? Nope, this is his longstanding and cynical campaign to cut VAT.
Under the Labour years, when Balls was encouraging Brown to adopt a ‘scorched earth’ policy to the public finances, he urged against raising VAT to 20 per cent as Alistair Darling wanted. Not because he didn’t think it was necessary, but because he knew that if Darling didn’t do it, Osborne would. So VAT could be an election campaign tool, and then a stick with which to beat the wicked Tories (and the Lib Dems, who dropped the ‘VAT bombshell’ that they warned of).
There is also politics: Tories prefer taxing consumption to taxing income. But there’s a third element. Balls is betting, and I think correctly, that Osborne will be forced to cut taxes to try to encourage growth. So then Balls will say: I told you so. This, you can be sure, is behind his nod towards the Lib Dem policy to raise the income tax threshold to £10,000.
But reducing VAT would increase demand, much of it for imported goods, and is a pretty poor way to create jobs in Britain. A tax cut aimed at the low paid is best option in the circumstances. Let’s hope Osborne sees it that way too.
UPDATE: Michael Fallon has been on BBC1's new Sunday Politics rebutting Balls:
Fallon is one of the smarter and shrewder MPs in parliament, but I think his response here offers two major hostages to fortune. Britain's AAA rating is guaranteed not by Osborne's parsimony (he's borrowed more than even Labour planned to), but by Sir Mervyn's Magic Money Machine — and if the QE experiment goes wrong, the AAA rating will go. As America's downgrade demonstrated, the markets buy debt anyway. I'm all for fiscal sanity, but the AAA rating is a false god. Next, interest rates will inevitably rise. Right now, rates are artificially, dangerously low (thanks again to QE) — causing real pain for hundreds of thousands of pensioners. Polls show that more people dislike low rates than like them. Fallon should realise that low interest rates will not be a winner come the election: dismal returns on savings and annuities is increasing pensioner poverty and decimating living standards. Low rates are appreciated by the young things who run government: for them it means a cheaper mortgage, and QE's inflation makes expensive houses all the more valuable. But when it comes to people who vote, the losers from the low-rates policy outnumber the winners.‘Ed Balls remember, was Gordon Brown's right hand man when they racked up all that debt. Now he wants to splash 12 billion pounds on unfunded VAT cut, which would have to be borrowed. That would mean even higher debt, and that would mean in the end we'd lose our triple A rating and everybody would have to pay more for their mortgages and more for their loans. Not a good idea.’
I suspect Fallon knows this, but is dutifully repeating the Treasury line. He ought to resist. This is not a game of chess with Labour, but a mission to save the British economy. QE and its low rates may be a net benefit for the economy, but the losers are statistically more likely to vote than the winners. Osborne ought to bear this in mind.
Previous
Nick
February 19th, 2012 1:10pm Report this commentOf all the taxes to cut VAT is by far the most retrograde. I thought we wanted to rebalance the UK away from consumption (of largely imported goods) and instead spend more on investment and infrastructure.
Cut taxes on productive areas of the income. Tax breaks for investment. Lower corporation taxes. Lower taxes on employment.
Faceless Bureaucrat
February 19th, 2012 1:13pm Report this comment"But reducing VAT would increase demand, much of it for imported goods, and is a pretty poor way to create jobs in Britain. A tax cut aimed at the low paid is best option in the circumstances."
But how does a tax cut help the retired or those on a fixed income? VAT reduction is surely better for them than raising the tax threshold on income they don't receive?...
telemachus'
February 19th, 2012 1:20pm Report this commentBalls has a key plan to stimulate the economy while reducing the tax burden of the solid phalanx of England so weighed down since May 2010. Listen Mr Osborn
Dave B
February 19th, 2012 1:21pm Report this comment@Faceless Bureaucrat
VAT is already low/absent on the necessities.
Heartless Curmudgeon
February 19th, 2012 1:34pm Report this commentJust . . . CUT TAXES FFS !!! ANY tax! - and STOP government waste!
The sleepwalking H2B, being too dim to see that need, and infected with socialist faux 'fairness' PC bullsh*t should, with much benefit, be given a simple cleaning job somewhere.
Jeremy
February 19th, 2012 1:43pm Report this commentBonkers wants us to borrow more in order to pay for tax cuts - which is a bit like advising the Titanic that it can only reach port safely if it agrees to take in more water.
Bonkers is as Bonkers says.
Russell
February 19th, 2012 2:34pm Report this commentBalls has been droning on for over a year saying that increasing vat to 20% is dreadful and massively damage people buying goods.
January 2012 retail sales are UP 2% on January 2011!
Cutting vat by 2.5% would result in the treasury losing £12 billion pounds per year, increased borrowing + the interest on that borrowing.
If the govrnment had left vat at 17.5% in January 2011, that would have resulted in an extra £12 billion borrowed for the last year.
Balls is a complete idiot.
Barry Bilge
February 19th, 2012 3:06pm Report this commentIt is not automatic that cutting VAT = increased borrowing. They could, y'know, cut spending too.
Slim Jim
February 19th, 2012 3:24pm Report this commentOn the Andrew Marr show this morning, he asked Balls the question I've been waiting for him to ask. What would happen to the Debt if we followed your plans (not verbatim)? Balls completely and utterly dodged that one as he well might. He knows damn fine that our national debt would increase, and the effects that would have. He's a nasty piece of work, make no mistake. Sadly, arses like him (and I include the blue side here too) like to play politics instead of concentrating on sorting out the mess.
mongoose
February 19th, 2012 3:28pm Report this commentThe dispute about which tax to cut reveals a basic difference in the diagnosis of our economic woes. Balls thinks there is plenty of spare capacity and that the problem is deficient demand. But the OBR thinks the "GDP gap" is smaller, and doubts that there is room for a non-inflationary demand-boosting fiscal stimulus. This also has a bearing on what "growth" means. For Balls, and also much media commentary, "growth" means short-term recovery from the recession, back to trend. But on the other hand if we are actually not far off our long-term trend (because of a permanent step down in the trend due to the banking crisis etc) then "growth" must be the steepness of the trend itself, i.e. the long-term interpretation. To encourage long-term growth we need savings and higher interest rates, whereas to boost the "recovery" we would want to encourage consumption, e.g. with lower VAT and lower interest rates. I think Balls's diagnosis is wrong, but if it is then the monetary stimulus from QE will be inflationary. In other words I fear the policies being pursued by Osborne and King are contradictory.
ButcombeMan
February 19th, 2012 5:47pm Report this commentVAT is precisely the one tax not to cut because in the UK the essentials of life are either zero rated or bear a low rate. The argument might be differrent in another country where VAT is on everything (as it should be incidentally-it works best that way).
Cutting VAT would assist the big spenders, the rich, the more economically bouyant south east and tourists. The richest 20% of the economy pays 80% of the VAT.
Balls is wrong. To think that a mind like his had anything to do with running the economy is very depressing.
Fraser Nelson
February 19th, 2012 6:16pm Report this commentSlim Jim, it pains me to say it but Labour planned to increase debt by 58% over the parliament if they had been elected. Osborne will increase it by 60% - i.e., worse than Labour. Balls wants to attack Osborne for parsimony, so he'll never admit that the real gvt failure is borrowing too much.
Mirtha Tidville
February 19th, 2012 6:18pm Report this commentWell said Fraser..Someone has finally pointed out what a rotten deal the millions of savers are getting in this country and believe me, many of us are sick to the back teeth of subsidising the `pretty things` mortgages.
Looks like it might become a vote loser sooner than I thought..Excellent
Nick
February 19th, 2012 6:54pm Report this commentI'm sorry Fraser but could you stop this constant ridiculous comparison of what Osborne is currently planning on borrowing with Labour borrowing plans from three years ago.
It is just nonsense. Just to take two crucial differences between now and then - the much higher than expected oil price and the Eurozone crisis.
And that's before you even begin to factor in that Darling's borrowing plans were predicated on ridiculously high growth forecasts of 2.5%+ and weren't "independent" OBR forecasts anyway.
Magnolia
February 19th, 2012 7:11pm Report this commentFraser confidently implies that the LibDem policy to raise the tax free allowance to £10K is a tax cut which is aimed at the low paid.
It is aimed at them but does it hit it's target?
Everyone who pays tax on an income which is less than £100K will benefit and that includes a lot of 'wealthy' people indeed.
Fraser should know better because the Centre for Social Justice has produced information that says that a transferable marriage tax allowance would do more to help poorer families because they are more likely to fall in to the single income family tax penalty trap which takes more tax than is gained from raising the threshold for tax.
Slim Jim
February 19th, 2012 7:36pm Report this commentFraser, Nick has said exactly what I was going to say. Balls still dodged the question...and another reason we aren't going to get much economic growth is down to the 'support' of the yellow corner. Whichever way you look, the Debt is going to keep on rising, but as I said, and I don't mind repeating, the political class would rather see who can pish higher, rather than get to grips with a serious problem. They cannot protect us from our enemies, and they haven't a scooby what the heck to do with the economy. We're currently about 8 on the Doomometer.
The Crunge
February 19th, 2012 7:51pm Report this commentThis man has absolutely no interest in solving our national problems he simply wants to return to power a position to which he believes he is entitled. Mr Balls longs for economic destruction because he believes that a socialist paradise will rise from the ashes of Capitalism. He cares nothing for the suffering that will be endured by ordinary people as a result of mis megolamania and lunatic policies.
Adlai Stevenson described Richard nixon as "the only man I have truly hated". When i look at Ed balls and Gordon Brown I know exactly how he felt. Arrogant filth both of them.
Davey L.S
February 19th, 2012 8:22pm Report this commentFraser, the young things who run government are not the only ones who have a mortgage. I fully appreciate the immense misery that low interest rates are causing for savers, and that they are unpopular at to say the least. But people have gotten use to low mortgages as well, it will be interesting to see what the polls say about this when interest rates rise, whether low rates are popular or not at the next election, no government will want to be blamed for a rise in mortgages.
Sir Everard Digby
February 19th, 2012 9:03pm Report this commentPlease,please stop talking in their terms-'Value Added Tax' is a Heathism to make this sound like Purchase Tax which it replaced; the only value it adds is to the Government's coffers. It is an unpleasant French invention,which we would do well to avoid.
The only workable tax system is a simple one with very few exemptions/exceptions. Anything else will need policing and will never succeed. VAT pervades all our lives;it's charged on fuel as well as fuel duty -as most of our goods are delivered by road, this tax alone is depressing the economy. Worse still many of us are tasked with collecting it for the government. I would prefer the return of Dick Turpin.
Robert Christopher
February 19th, 2012 9:34pm Report this comment"Balls the tax-cutter?"
Tax, the balls-cutter.
2trueblue
February 19th, 2012 11:26pm Report this commentBalls was one of the authors of our economic disaster and made no effort to provide any coherent financial strategy when the whole thing imploded. He has nothing to offer now that we are trying to wade through the mountain of debt created by Labour. The whole fabric of our infrastructure was pretty well decimated during Labours government. It was supposed to be a time of growth and yet there is not one area they left strong and fully functioning. That alone says everything about Ball, Brown, Blair, Whelan, Cooper, Milliband.
He gets far too much airtime. Unable and unwilling to answer questions
ButcombeMan
February 20th, 2012 12:02am Report this commentSir Everard Digby
February 19th, 2012 9:03pm
"Please,please stop talking in their terms-'Value Added Tax' is a Heathism to make this sound like Purchase Tax which it replaced; the only value it adds is to the Government's coffers. It is an unpleasant French invention,which we would do well to avoid".
It is a very silly tax which if we had not joined the EU we could have stayed well clear of. One of the biggest proselytysers about VAT? Why, a young Shirley Williams.
Crank ideas have not just come recently to LibDems. They are are always at it.
Colin Cumner
February 20th, 2012 6:12am Report this commentTaxing consumption IS a fairer way of raising Government revenue than via income which is always a disincentive. Whether a rate of 20% is too high is debatable but reducing tax on income, high or low, can only be welcome to the vast majority of Britons. As far Balls' recent comments, they would be fare for comedy were the situation not so serious.
Holly ......
February 20th, 2012 7:26am Report this commentMr Fraser.6.16pm.
Labour 'planned' to increase debt by 58% over the parliament, but you can bet your home that it would have ended up much more than that.
Balls, Miliband & Labour are not interested in getting the country back on track to a sounder economy, they just want to get back into power.
More state funded job creation,with all the future 'add on'costs in pensions.
They will get more desperate as things turn around.
Labour are predictable and boring.
They have not got their U-Turn on the NHS reforms by wheeling out one union after the other,they now resort to their default setting and wheel out the pediatric union.
Fear & loathing..They can only peddle fear & we loathe them.
What was it that Labour bod said about Miliband & Balls?
Oh yeah...They are cr@p.
Clear Memories
February 20th, 2012 9:18am Report this commentBalls should not recieve air time or the breath of publicity for his pronouncements. He was a leading partner in the worst government in UK history, a malicious, nasty little socialist and a re-writer of history to boot.
The only thing I want to hear about Balls --- is that he's been hung by them.
Bounderby
February 20th, 2012 9:48am Report this comment"As America's downgrade demonstrated, the markets buy debt anyway"
In UK, total BoE purchases + total foreign central bank purchases are greater than total debt issuance - ie private sector - "market" - has been net seller of gilts at false price the BoE is creating. Minimum Funding Requirement and Annuity rules prevent pension funds from selling much, further amplifying non-market false price.
Similar in the US - china et al maintaining currency peg to dollar requires them to buy US assets at rate equal to their current account surplus with the US - this almost 100% goes into Treasuries. Total foreign central bank purchases plus Fed QE purchases cover the US deficit - ie there's no reliance on market/private sector funding. Similar pension fund laws cause non-market investments to be held.
China/middle east/russia etc are all increasing domestic spending in favour of more reserves - causing reserve asset growth to slow and potentially start to reverse.
When QE ends the US and UK will have to start finding market buyers again for their debt - the prices where markets will buy will be miles from the current govt set rates.
Italian experience of QE in late 1970s was that preventing market discipline working through central bank price setting of government funding rates creates much bigger crisis in the end. Can't see what will be different here (although this may take 1-2yrs to work through).
dorothy wilson
February 20th, 2012 9:48am Report this commentThe article by Balls in the Sunday Times yesterday was sheer hypocrisy. He likened the situation now to that of the early 80s and then gave a long list of the dire consequences of the Conservatives' policies then. He omitted any mention of the dire mess left behind by Labour in the late 70s and the similar dire mess left behind in 2010.
Dadad
February 20th, 2012 11:29am Report this commentWhat makes Balls and Osborne identical to each other is that neither has any plan to reduce this country's total borrowing; all that they talk about is who will reduce the increase more. Why won't anybody grasp the nettle and produce a plan to cap spending and reduce total borrowing ? Or even keep the figure stable to start with. This is the fundamental problem which needs to be addressed. How utterly pathetic they all are.
Dimoto
February 20th, 2012 1:50pm Report this commentI hope (and believe) that Mr Nelson's analysis is incorrectly focussed.
Osborne's priority is still the deficit.
The economy is showing signs of life (despite all the idiot doom-mongers so beloved of the Speccie and it's bloggers).
January was a good month for the deficit, and some estimate, that the 2011/2012 deficit will come in at around £120B - i.e. below the original target and far below the (November) revised target.
The revised targets were a necessary contingency, but the Treasury surely expected better if the Euro crisis were to hush-up for a while.
I would hazard a guess that Osborne still aims to reach the original targets for debt reduction, giving room for some tax easing later on.
Thus, any tax reductions in the upcoming budget will be designed to support the recovery and keep the tax receipts flowing, not to deliver short-term political relief to certain groups or to "counter Balls".
Balls has no credibility with the electorate.
Every pensioner would benefit most, from the earliest possible reduction in the deficit, no further QE and the earliest possible start on (government) debt reduction.
Lets leave the short-term, opportunistic stuff to the likes of Balls !
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