Shadow Labour Chancellor Ed Ball’s call for a permanent or temporary VAT cut puts him half into the same camp as liberal think tanks who opposed the VAT rise in January. Philip Booth, Programme Director at the Institute of the IEA wrote
“Today’s VAT rise is simply bad economics… If the government insists on increasing taxes, there are better candidates than a general VAT rise.”
Where Balls and Booth part company however is on the flipside of the balance sheet. Booth writing:
“Today’s news should be a wake-up call that the spending cuts are insufficient. If the government wishes to prevent growth from stalling, it will cut spending further, not burden the population with an unnecessary tax rise.”
Balls, a Keynesian of sorts, remains convinced stimulating demand alone can restore growth.
Economic growth fundamentally is based on doing new things and more commonly doing old things more efficiently. It is a supply-side issue. If you increase the money supply without improving productivity you just increase inflation. Interest rates rise, we are all worse off.
Two important element of Keynesianism are also missing from the Shadow Chancellor’s analysis . Firat that the last government, of which he was a leading player, should have been running a surplus during the long boom in the last decade. Not a deficit in every year since 2001. The surplus would have taken some heat out of the boom, and provided a fighting fund for the crash.
Second Keynes did not confuse government spending with government investment. Investing in infrastructure such as roads, or development such as scientific research is clearly a very different growth proposition to spending on welfare and public sector pensions.
In that regard Balls is not a very good student of his own economic philosophy, Keynes did not advocate profligacy. A VAT cut without corresponding reductions in unproductive spending would be just that.