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We need Balls-plus

Were Ed Balls prescriptions desirable? Yes. Were they sufficient? No. He wants to repeat the bank bonus tax, bring forward long-term investment plans, reverse January’s damaging VAT rise for a temporary period, cut VAT to 5% on home improvements, and give a 1-year national insurance tax break for every small firm that takes on extra workers. Fine as far as it goes, but it doesn’t do the one thing which is really required – getting the economy going again on a sufficient scale to secure a genuine recovery. It’s tinkering, but not the real thing. To achieve that requires an understanding of what the fundamental problem of the British economy really is.

The key problem is not indebtedness, it is lack of demand. The Tory government policy of massive cuts in public expenditure and benefits, plus the VAT increase, is drastically worsening the problem of lack of demand without hardly reducing the deficit at all because of falling tax revenues and rising unemployment. The alternative – the only way to get out of slump when the private sector contracts – is a public sector-driven jobs and growth strategy, getting people off the dole and thus hugely reducing the cost of benefits, and into work so that regain their independence as well as then being able to contribute to tax revenues.

Keeping a million people on the dole costs £7bn a year. For the same amount of money 400,000 jobs could be created. And the country gets a double whammy: jobs are created in areas where they’re urgently needed in housebuilding, in improving transport and energy supply, and in creating the new green, digital economy. And the deficit is cut faster as growth slowly but steadily begins to take off again.

Of course Osborne, who is driving the economy into prolonged stagnation and obstinately refuses to change course, jibes: how can it be funded? We should tell him. First, the growth dividend even from a minimum 1.5% growth a year still yields £40bn to government revenues over 4 years. Second, we should tax the banks and the super-rich since they largely caused this recession in the first place and so far have made virtually no contribution to pay for it. A Financial Activities Tax (FAT) in the City even at the very modest rate of 0.05% would raise over £10bn a year. And for example the removal of pension tax relief from the very rich, which surely cannot be justified, would raise another £10bn a year.

Even if it were necessary to borrow temporarily to kickstart the economy, which I would very much doubt, Britain is in a strong position to do so. Our debt-to-GDP ratio is modest, slightly higher than Germany, but lower than France and the US, and far lowed than Italy or Japan. And hardly surprisingly, even the IMF is now swinging in favour of public intervantion rather than driving the economy Osborne-style into the buffers.

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