‘Why Tax Cuts Won’t Do The Trick’ Posted on November 22nd
5:11am UK, Saturday November 22, 2008
As more details emerge of what is expected to feature in Chancellor’s Pre-Budget Report, a leading economist says the Government’s proposed tax cuts will not help boost the economy.
Prof Minford doesn’t think tax cuts will boost consumer spending
Mr Darling hopes the cuts will lead people to grab their wallets and purses and start spending again, giving retailers a much-needed boost.
Also high on the agenda are new moves to help homeowners struggling to pay their mortgages.
Banks will come under pressure to stem mortgage repossession - possibly by allowing a three months grace period before taking legal action.
But Patrick Minford says if the tax cuts happen, taxpayers will know that in the future there will be higher taxes and so they will put some money aside for this.
Chancellor’s Pre-Budget Report
As a result, he suggests, they won’t spend more and the tax reductions will not make a difference.
He told Sky News: “The people who lend to the Government want a higher return on their money because they are worried about the Government not paying them back.
“The worse the Government’s debt situation, the more they worry. That offsets the effect of the tax cut because it costs people more money to borrow.”
Prof Minford, from Cardiff University, wants the Bank of England to play a larger part in helping to stimulate the conomy.
He said: “It can cut interest rates - the base rate. It’s still got further to cut. It can borrow in the markets at quite a low rate and it should lend on to the banks at that rate to bring bank rates down. The Bank of England can do a lot more than it’s letting on and it should do it.”
He thinks we are probably in a recession now, if not technically.
So how long will it last?
Prof Minford said: “It depends on how much the downward momentum is and that seems quite strong at the moment.”
Professor Patrick Minford
He added: “We’ve had a year of very tough monetary conditions which suggests that we’re going to have a recession for at least another year after it started.
“We’ve had a year of really tough money and that takes time to work into the economy and once it’s working in, it’s got to work its way out.”
But he also said there was some good news as: “The Bank of England has woken up out of its deep sleep about this”.
He said if the Bank brings down the cost of money and the Government puts pressure on the banks to lend more and they do, “then you’ve got a major policy instrument that’s starting to offset the recession”.
He thinks if this happens then “we could see the recession start to bottom out towards the end of next year and 2010 could be a bit better.”