Tax Stimulation

The major political parties seem to be falling over themselves in drawing up an agenda for tax breaks and tax cuts as a way of using fiscal policy to stimulate the British economy and avoid the worst excesses of a deep recession.

The Conservatives have announced plans to cut stamp duty for first time buyers in the property market. This strikes me as a foolish idea, far better to let prospective buyers wait whilst prices fall. Tax relief on property when the market is declining at double digital annual rates is ineffective - like pissing into a strong wind.

They will also raise the inheritance tax threshold to £1m - but this is not really a credible apporoach to stimulating demand in the short term. They have announced plans to cut corporation tax from 28p to 25p - this will make little difference when business profits are in freefall - and they want to introduce cuts in employer national insurance contributions for firms who take on the long term unemployed.

Gordon Brown has not yet gone public on his emergency tax-cutting plans - we have to wait for the Pre-Budget Statement for news on this. What in recent years has become one of the most boring and utterly deflating economic events of our age might just be worth watching this time. But don’t put your shirt on it, the Pre-Budget Statement is often an occasion for re-announcing spending plans or flagging up tax changes that might come in in 2009 or even later. What matters in the statement is Darling’s revised economic forecasts - he will make swingeing reductions in his growth outlook - and the likely path for government borrowing. The markets are already spooked by this.

The (largely irrelevant) Liberal Democrats have launched their own economic recovery plan arguing for a 4 per cent reduction in the basic rate of income tax and funded by higher taxes on the top income earners.

How economically illiterate is that? Cuts in direct tax might well provide a boost to disposable income but they are likely to be saved and add little to demand. For the growing army of unemployed or those on incomes low enough to be out of income tax altogether, any reduction in the basic rate is almost meaningless.

Far better to target tax reductions on small to medium sized businesses through reductions in national insurance contributions and a six month holiday on VAT payments. And to cut the standard rate of value added tax from 17.5% to 10% - a measure which will bring down the cost of living, lower core inflation and provide a boost to real living standards. It would also give media hacks a chance to pursue those firms who opted not to pass on any cut in VAT - a new witch-hunt not dis-similar to the pressure applied to the banks when the BoE made its aggressive rate cut last week.