{"id":59784,"date":"2021-10-25T11:39:20","date_gmt":"2021-10-25T10:39:20","guid":{"rendered":"https:\/\/www.taxresearch.org.uk\/Blog\/?p=59784"},"modified":"2021-10-25T11:39:20","modified_gmt":"2021-10-25T10:39:20","slug":"its-time-for-a-stimulus-not-cuts","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2021\/10\/25\/its-time-for-a-stimulus-not-cuts\/","title":{"rendered":"It’s time for a stimulus – not cuts"},"content":{"rendered":"

I was one of about 90 signatories to this letter issued last week. As with all these things, I don't agree with every word, but do with enough of the sentiment:<\/em><\/p>\n

Open Letter to the Prime Minister and Chancellor\u00a0<\/b><\/p>\n

22 October 2021<\/b><\/p>\n

A SPENDING REVIEW FOR A GREEN AND CARE-LED RECOVERY\u00a0<\/b><\/p>\n

Dear Prime Minister and Chancellor,\u00a0<\/span><\/p>\n

Your Budget and Spending Review next week give the Government the opportunity to demonstrate that its commitments to \u201cbuilding back better\u201d and \u201dlevelling up\u201d after the pandemic are genuine and not just empty slogans. We urge you to use this opportunity to deliver the major increase in public investment needed to rebuild the economy on a secure and sustainable footing.\u00a0<\/span><\/p>\n

In particular we urge you not to let the misguided economics implied by the rhetoric of \u201cfixing the public finances\u201d determine your choices. Consolidating the public finances before the recovery is well on its way would be highly economically and fiscally irresponsible.\u00a0<\/span><\/p>\n

The UK\u2019s economic recovery from Covid is already slowing down under the impact of supply chain and labour shortages. The latest figures show unemployment at more than one and a half million people, or 4.5% of the labour force.[1] Around a million people were estimated to be still on the furlough scheme when it ended on September 30th, and employment is not expected to recover to pre-Covid levels for years to come.[2]<\/span><\/p>\n

At the same time your government has made welcome commitments to tackling the climate and environmental crisis, reducing geographic inequalities, and building a proper social care system.\u00a0<\/span><\/p>\n

In the US, President Biden has shown how ambitious public investment, supported by borrowing and taxation, can drive broad-based prosperity and job creation.[3] The UK has one of the lowest rates of overall investment in the developed world.[4] And at just 2.2% of GDP, public investment is also considerably lower than the OECD average of 3.3%.[5]\u00a0<\/span><\/p>\n

As in the US, the UK still has room for public borrowing. The pandemic has raised public debt to around 100% of GDP, but what really matters is how much the government is spending to service the debt, and the value of the spending which the borrowing finances. In fact near-zero interest rates mean that the government\u2019s debt service payments are now at their second-lowest level since 1950, at just 6% of tax receipts.[6] Moreover the Bank of England owns nearly 40% of the debt, and repays any profit on the interest it receives back to the Treasury.[7] It can continue to support borrowing at low interest rates.\u00a0<\/span><\/p>\n

Public investment will repay its financing over time through higher taxes and revenues as fiscal and wider economic multipliers kick in. We know from the experience of austerity that attempting to cut debt by cutting public spending is self-defeating and does not work.[8]<\/span><\/p>\n

It would therefore be a grave economic error to focus now on \u201cfixing the public finances\u201d by cutting back vital investment and public spending. As we saw during the austerity years, the human cost of doing so would be felt most acutely by those at the sharp end of inequality.\u00a0<\/span><\/p>\n

We urge you therefore to use the Budget and Spending Review to introduce a fiscal stimulus package of around \u00a370-90bn in annual spending over the next three years over and above current plans, equating to 3-4% of GDP. This would be the level which would return the UK economy to its pre-pandemic growth path and stabilise public debt. We believe the stimulus should be focused on a green and care-led recovery, with a major focus on investment in disadvantaged areas. This would meet the Government\u2019s own stated goals and would enable you to start building the critical infrastructure - both physical and social - needed for a thriving modern economy.\u00a0<\/span><\/p>\n

In particular:\u00a0<\/span><\/p>\n