Wolf’s Plan B

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Martin Wolf’s opposition to the ConDems’ cuts is now well known. And he’s right to say it, of course.

In his latest posting for the FT he says:

If one accepts Mr Posen’s argument that the economy is likely to suffer from deficient demand in the medium term, a simple option would be to proceed with the spending cuts, but slash taxes temporarily — national insurance contributions, for example — and fund the revenue shortfall by borrowing from the central bank. This would give a direct injection of purchasing power into the economy, while promoting employment. Then, as the economy rebounds, these tax cuts can be reversed.

Such a co-ordinated policy by the government and the central bank would be just the “Plan B” many are looking for. Accepting years of feeble growth and chronic excess capacity would surely be a foolish alternative.

I have no problem with this, with one refinement. Since the wealthy are saving right now they do not need a tax cut: to give them a cut would exacerbate the problem of shortage of demand in the economy whilst increasing the deficit at the same time.

So as I and colleagues said for Compass last year, the answer is serious tax cuts for 90% in the UK, tax increases for 10% and no cuts at all.


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