Balls the tax-cutter?

‘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:

‘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.’

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.

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.