It’s almsot pantomime season, and that means that Tinkerbell economics is in fashion.
What’s Tinkerbell economics?
They’re economic policies that posess the amazing property of allowing you to pay for new pledges without either reducing spending or increasing taxes or borrowing. Tinkerbell economics only makes sense if you “Clap your hands and believe”.
So let’s apply the Tinkerbell test to Tory tax policy.
A month ago, at Tory conference, David Cameron promised to “rein in Government borrowing.”
Just last week, the Conservative party was briefing that there should be no “irresponsible” tax cuts, and that the priority should be to do “nothing that would reduce the likelihood of the Bank of England cutting interest rates”. Fiscal responsibility was the cry.
Indeed George Osborne said ““There is the choice of spending without restraint and borrowing without limit – the choice Gordon Brown seems to be making. It is a weak and irresponsible choice…”
Pretty clear eh? Borrowing bad. Fiscal restraint good.
Today though, every media outlet is covering news that the Tories are about to propose Tax cuts.
Indeed, Osborne writes in the FT:
“Targeted tax cuts would help but they must be properly funded. Any tax cuts must not permanently increase the structural deficit and must be combined with a strategy to reduce it over time.
Now, note George Osborne says his tax cuts won’t increase debt. How come the Tory tax cuts won’t increase the same borrowing that they condemn from the government, without also involving any spending cuts?
This is where Tinkerbell economics comes in.
They don’t, as long as you close your eyes, cross your fingers and believe.
After all, It’s always possible that if David Cameron spent last night on Captain Hook’s pirate ship, where he was able to steal enough gold to pay for his tax cuts.
It’s just not particularly likely.
So it’s a sign that the Tories are in a mess on the economy, that they won’t say how their policies will be funded, as Justin Williams says in the Telegraph.
“how will the Conservatives fund their tax cuts? Er … they’re not saying. Last night, we asked repeatedly for clarification over these “fully funded” fiscal plans but were brushed off. Dave’s people were quite happy to supply a few soundbites about how irresponsible Labour is being but when it came to actually spelling out how their plan would work, forget it.”
So there you go. The Tories are expecting us to just believe that their tax cuts won’t have the same effect as the increased borrwong they so fevently opposed last week.
So here’s the Tories position.
They’re against extra borrowing – except for all the tax cuts that they propose.
They’re against extra spending, except for all the spending commitments they’ve made.
and when it comes to paying for it all?
Well, all you need to do is clap your hands and believe…
6 Comments
November 10, 2008 at 12:32 pm
Also bear in mind that they think this mess is because of too much borrowing (public and private). But in arguing that lower interest rates should be the way to stimulate demand, he effectively proposes more borrowing and less saving.
Osborne says that fiscal stimulus would mean that “future generations will be burdened with even more debt…We would be sowing the seeds of the next crisis”.
Hmm. “Spending our way out of recession will not work.” But borrowing our way out of recession will?
(NB I’m not saying that we should therefore oppose lower rates; just that his case against fiscal stimulus applies also to monetary stimulus.)
November 10, 2008 at 3:15 pm
The Tory policy seems to be “spending our way out won’t work. Neither will borrowing for tax cuts, as that would be irresponsible. But some small tax cuts that benefit the wealthy, that’ll work both to get us out of recession, and without putting pressure on borrowing too!”
It’s dishonest nonsense. Either the tax cuts would be too small to have a significant impact, or they’d have exactly the same effect that the decry from others.
November 11, 2008 at 10:06 am
You don’t need to borrow to introduce tax cuts. If the Conservatives focussed on cutting out some of the ridiculous waste that Labour have introduced (the Taxpayers Alliance have been excellent at exposing this) then tax cuts would be immediately affordable.
November 11, 2008 at 12:12 pm
Which would be a completely pointless exercise, as it would just move X amount of aggregate demand from government spending to private income. In fact, as the impact on aggregate demand would be X/(1-the marginal propensity to save), it would be a procyclical move not a countercyclical move.
Even spotting you the magic ability to determine “waste”, kill the selected projects and recover the cash to the Treasury, which all governments and oppositions without exception promise to do but never seems to be done, this makes no sense.
November 11, 2008 at 12:33 pm
Agreed. Tax cuts that are “fully funded” in the short term are not particualrly stimulating ones.
It’s odd: surely the Tories should be demanding fast and hefty cuts to tax. They believe, after all, that over time this will cause faster growth and thus higher tax receipts. So they should advocate “unfunded” cuts now and let Arthur Laffer pick up the tab in years to come.
November 11, 2008 at 1:36 pm
Tom,
I really don’t understand tory strategy now. It seems to be that they are so terrified of being called “cutters” that they are abandoning what strikes me as a once in a generation opportunity to recast the political narrative around tax cuts and spending.