Gordon’s £500 million benefit spree would be better spent on tax cuts than handouts
There are several ways one might look at Gordon Brown’s leaked plan to send £150 to each of the seven-plus million families receiving child benefit. The first, and kindest, is as an attempt to ease the coming winter’s budget strain on what Sir Brian Bender, permanent secretary at the Department of Business, Enterprise and Regulatory Reform, during a first-class train ride from Leeds to London, too loudly dubbed ‘ordinary people’ — not the needy, the more numerous ‘ordinary’.
The second is as a straight-out election bribe, part of the ‘fight-back’ that the Prime Minister is planning for the autumn. Why he imagines that this will offset the unpopularity his policies and dithering have brought down upon his head escapes most observers. The voters have come to understand that what Brown giveth, Brown taketh away — he can only give them a portion of the taxes he has taken from them either directly or by stealth. The most likely result is that the voters will do a Woody Allen: take the money and run, in this case to the polling booths to vote for the Tories at the first opportunity.
The third possible interpretation is that the Prime Minister knows that the game is up, that he will soon be Leader of the Opposition, or worse, and that it would be fun and shrewd politics to leave the public finances in such a mess that the Tories would never be able to sort things out. After all, £1 billion here (the fuel allowance), several billion there (to compensate 22 million people for the loss of the 10p band), and soon you’re talking about real money, to paraphrase a politician in my country. Brown might be hoping to drown an emerging Tory government in a sea of red ink, forcing George Osborne to raise taxes.
The PM is planning to fund the new handout by requiring power suppliers to ante up for some of the emission permits they are now scheduled to receive free of charge. But since these utilities cannot print money, they will have to pass on the extra costs to — the very people who will be receiving cheques from the government. Another stealth tax, concealed in utility bills.
Now, it does make sense to charge polluters for the permits to pollute, rather than distribute them without charge. But the intended use of the proceeds is, at the very least, problematic or, to regress to economists’ jargon, sub-optimal. Strip the handouts of their pur ported relation to rising fuel bills, and they are merely money — what we in America call a fiscal stimulus. Dust off your dog-eared copy of Keynes if you need refreshing about the use of a demand stimulus to combat recessions. If the real goal is to pep up a sagging economy, the money would better go to those more likely to spend it — say, the 5.5 million families receiving child tax credit. That would buy the votes of two million fewer families, but do more to stimulate the economy. Such means-testing would more fully satisfy Brown’s goal of redistributing income from the middle class to lower earners — something the middle class will surely notice and resent.
Unfortunately, the payments would not provide much of a stimulus, as the costs passed on by the utilities to cover the price of permits would probably drain as much from consumers’ pockets as the cheques from the government add to their incomes. But give the Prime Minister the benefit of the doubt, and assume that the payments are indeed in essence a Keynesian fiscal stimulus of the sort that has been at least modestly successful in the US.
If a stimulus was good for America, why not for Britain? For several reasons. First, when the slowdown began in America, the state of the government’s finances was far better than it was in Britain when the UK economy weakened. So the British government’s room for fiscal manoeuvre is far less than America’s.
Second, the US Federal Reserve Board has a dual mandate — to keep inflation under control and to maintain full employment. That is the balancing act in which Fed chairman Ben Bernanke is now engaged. Mervyn King, Governor of the Bank of England, and his monetary policy committee colleagues have a different mandate — to control inflation. Period. That inevitably means that the Bank of England has to be more hawkish than the Fed and, true to its mandate, it has been holding interest rates higher than in the US in an effort to contain rising prices. It has not been entirely successful, as a trip to the supermarket makes clear, but if oil and commodity prices continue to decline, and credit-fuelled buying falls off, it just might put the inflation genie back in the bottle by the end of the year. Unless the government slips even deeper into the red.
Unfortunately, the Bank has two new problems. The pound is weakening, adding to inflationary pressures by making imports more expensive. Equally important is the increasing vulnerability of the government to pressures from its trade-union paymasters to abandon its hard line against wage increases is raising inflationary expectations.
Brown can make King’s job easier if he resists the temptation to buy votes. Instead of spending the £500 million received from permit sales, he might use the money to reduce the flow of red ink on to the Treasury’s books. (I say Brown, rather than Alistair Darling, because it is well known that the Treasury has not been kept informed by the Prime Minister, who views his title as First Lord of the Treasury every bit as seriously as did Margaret Thatcher.) That would permit King to keep interest rates lower than they otherwise would be — a boon to the interest-rate sensitive housing sector and, by extension, to the entire economy.
Life during an economic slowdown is, however, never that simple. One need not be a dyed-in-the-wool Keynesian to understand that there are good arguments against attempting to reduce deficits when recessions loom. So the PM has still another choice. Instead of handing the £500 million directly to potential voters, or cutting the deficit, the government might lower marginal tax rates to encourage investment, risk-taking and job creation. That has a political disadvantage: the benefits are not as obvious to voters as a cheque-in-the-hand, the hated-bythe-Left high earners are the immediate beneficiaries, and the results take a while to make themselves felt. But the long-term economic benefits would be far superior to handouts or, in present circumstances, deficit reduction.
The Prime Minister is hoping that this specific example of government paternalism — funded, of course, with money extracted from some of the intended beneficiaries — will appeal to voters more than the long-term sound fiscal management of which he was at one time so eloquent an exponent and, for a short time, practitioner.
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