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Benefits, an increasing deficit and the obsession with cuts

Pace Andrew Mitchell, Osborne’s proposed £10bn benefit cut for poor families looks set to become the litmus test for the party conference season.

It is almost incredible that Osborne should be demanding this when (i) £18bn is already being sliced from benefits, (ii) no increase in taxes at all is being proposed to fill the gap, (iii) the very rich have made virtually no contribution whatever to meeting the bail-out costs, and (iv) extracting another £10bn from taxpayers is the wrong policy anyway, wherever the money comes from, and will be counter-productive. Clegg is now trying to claw back, in vain one suspects, a bit of the credibility he has so recklessly squandered by demanding new taxes on the rich, in particular targeting the top 10%.

But Clegg is the last person who should be suggesting it if it is to be taken seriously.

We certainly do need new taxes on the rich – whether an annual wealth tax, capital gains tax at 40% (where Nigel Lawson left it before Gordon Brown lowered it to 18%), a financial transaction tax, a land value tax, to mention a few. It is also true that, since the wealth owned by the top 10% is estimated at around £1 trillion, a once-only 4% levy would raise some £40bn, enough to turn the economy round by investment in house-building, infrastructure, and the foundation for a ‘green’ economy via the creation of 1-1.5 million jobs. But what Clegg is probably proposing (if indeed he’s thought it through at all, which I doubt) is a 1% tax which might fill the £10bn black hole.

But the real argument against the latest Osborne ramp is that it won’t work, even if the £10bn were forthcoming, We need to ask, what is the reason for this gap in the budget accounts? It’s because tax receipts are falling faster than the budget deficit is being reduced, and this is happening because incomes are shrinking, thus also bringing down consumer spending and thence tax receipts as well as diminishing companies’ willingness to invest. A policy of deliberately cutting incomes and therefore the aggregate level of demand is thus counter-productive. It won’t work. It won’t reduce the deficit, it will actually worsen it.

The obsessive fixation on cuts, and more cuts and more cuts – the favoured policy of both the right wing of the Tory party and the Blairite wing of the Labour party – is a monumental error, by far the biggest in recent macroeconomic history. Making cuts at the nadir of a deep and prolonged recession is a self-perpetuating vicious spiral. The time to make cuts is when the economy is recovering and not before, and even then a strong recovery is likely to bear down on any deficit far more effectively than any programme of cuts.

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