Coalition strategy to boost economy is having opposite effect, thinktank warns

[ttosca]

IPPR report urges temporary tax cuts and spending on infrastructure to boost investment from the private sector

The coalition government's economic strategy, intended to boost confidence and encourage investment, is having the opposite effect by deterring spending, a thinktank warned on Monday.

The sluggish recovery from recession will see the UK's long-term GDP growth rate drop to just 1.7% by 2015 ? its lowest level since the second world war and the equivalent of £165bn in lost output over 15 years ? according to the Institute for Public Policy Research (IPPR).

The report may well provide more food for thought for the chancellor, George Osborne, in advance of Wednesday's GDP figures which will show whether Britain lifted itself out of double-dip recession in the second quarter of 2012.

At the weekend, Boris Johnson, the mayor of London, urged greater emphasis on growth and appeared to contradict David Cameron's warning that the crisis in the eurozone could last up to eight years.

The International Monetary Fund has downgraded its forecast for UK growth to just 0.2% in 2012 and 1.4% in 2013.

The thinktank said that there needs to be a change in fiscal policy, featuring temporary tax cuts, additional infrastructure spending and further quantitative easing to boost demand and bolster anaemic investment from the private sector.

A two-year 2p cut in National Insurance would inject £14bn into the economy and could be paid for by the introduction at a later date of a permanent mansion tax on homes worth more than £2m, recommended the report. And the government could take advantage of historically low interest rates by borrowing £30bn for investment in infrastructure at a cost of just £150 million a year.

Using official statistics and Office for Budget Responsibility forecasts, the report calculated that by 2015 average growth over a 15-year period will have declined to 1.7%, compared to a historic average of 2.4% and a peak of almost 3.5% in the middle of the last decade.

The report called on Osborne to ditch his plans to eliminate the national deficit within five years, and be prepared instead to increase borrowing in the short term and spread deficit reduction over a longer period.

Rather than creating a favourable environment for business investment, as the chancellor claims, the IPPR said that the government's austerity measures have made companies and individuals reluctant to spend because of uncertainty about the future.

The thinktank's chief economist, Tony Dolphin, said: "The government should implement temporary tax cuts and a boost to infrastructure spending not offset by cuts elsewhere. This would mean borrowing more in the short term.

"Fears that more quantitative easing would increase the risk of higher inflation in coming years are misplaced. Inflation pressures in the UK in recent years have been imported and are largely the result of high commodity prices.

"Domestic inflation pressures, for example, wage growth, have been very low and this is likely to remain the case while there is a good deal of spare capacity in the economy. The time to worry about inflation is after the economy is restored to growth, not before," he said.

The report also called for a Jobs Guarantee of work at minimum wage levels for anyone unemployed for more than 12 months, at a cost of up to £2.5 billion a year, in order to boost demand and stop people dropping out of the labour market altogether.

Johnson urged greater investment in the economy and the encouragement of large capital projects to get the economy moving.

"I am worried that people are losing confidence and losing enthusiasm ... We need a more aggressive plan for more infrastructure," he told the Andrew Marr Show on Sunday.

He added: "There is a danger in overdoing the gloom. I don't think that this will go on for another eight years."

A Treasury spokesman said: "Tough decisions taken by the government on fiscal policy have created the space to support the economy through monetary activism, such as quantitative easing, and has also established credibility that has enabled firms and households to benefit from low interest rates.

"The government continues to look for ways to use this hard won credibility to support the economy, as seen in the recent announcements of the Funding for Lending Scheme and using guarantees to help investment in infrastructure, as it protects the UK economy from the ongoing uncertainty and instability in the eurozone."

www.guardian.co.uk/business/2012/jul/23/thinktank-questions-coalition-fiscal-strategy

flatpack-

But you don't know how much is. So the figure could be tiny or colossal. We've no way of knowing. I don't think the "Tax Justice Network" knows either, because those figures are US ones, and they may not apply to the EU or the UK.

The estimate amount lost in the UK to tax avoidance is nearly £70 Billion, according to the Tax Justice Network.

www.newstatesman.com/blogs/the-staggers/2011/11/tax-avoidance-justice-network

There have been a few attempts at estimating the true cost, all have come up with figures in the tens of billions.

Putting aside the fact that the figures quoted aren't based in reality,

Excuse me? Putting aside that you just tried to dismiss the figures without reason or argument, you mean?

how do you plan to collect this money?

a) Stop firing HMRC staff, as the government is currently doing.

b) Give more funding to HMRC to collect tax.

c) Stop making dodgy deals with companies like Goldman Sachs and Vodaphone which lets them off billions of pounds in tax.

What're you going to do to force rich people to hand over their money?

Go after them the same way that poor people are forced to hand over their money.

If that money was easily accessible, then it would have been taken by governments by now.

Not true at all. Governments are colluding and turning a blind eye to tax avoidance schemes. The reasons are manyfold, but among them are the fact that many MPs are millionaires themselves and probably use similar tax avoidance schemes. They also receive furious lobbying from corporates and wealthy individuals to reduce their tax burden.

So it isn't easy. And the owners aren't doing anything illegal by having it.

It's certainly possible to reclaim a substantial portion of lost revenue so long as there is a will. The problem is that there is no will, not that it's not possible.

I don't understand for a minute how you're going to get your hands on this cash.

It's not that complicated, really.

But you get the idea, don't you? It's called working together for the common good. paying your dues. Society. Even 'big' society if you want.

I get the idea. I can see now that the answer when we're spending more than we take in taxes isn't to cut spending so that we aren't putting ourselves in to debt.

We shouldn't be cutting any more spending because our deficit crisis has arisen from a lack of revenue, caused by the financial crisis, and subsequent bailouts and recession (and loss of tax receipts and welfare costs from people who are then unemployed). Ordinary people didn't cause the crisis, the financial sector did - and they they should be the ones who pay for it.

Government spending is not, and never was 'profligate'. In the last ten years, it has been at a recently historical average and a long-term historical low. It's not the fact that we spend too much money on doctors and nurses and schools that we're in too much trouble. It's because we spent hundreds of billions bailing out banks and are in the worst recession since the Great Depression.

What we can do is rummage down the back of the sofa for some small change, borrow some from a mate, pawn off the wedding ring, maybe even consolidate our debts in to one easy-to-understand monthly repayment.

Don't be stupid.

This isn't about the common good. It's about socialists taking money from people to pay for things that socialists like. It's not for the common good.

What on earth are you talking about? Wealth has steadily trickled upwards in the past three decades, from the poor and middle-classes to the richest. It's socialism for the rich, and Capitalism for the poor. The public has consistently subsidised and bailed out banks and private companies which fail. Wealth inequality hasn't been greater since the 1920s - and you're blaming 'socialists' for wanting to keep their hospitals open?

solo-

Well there you are. I think we already provide enough incentives for large companies, and would like them to pay more for the privileges of operating here in our relatively peaceful country.

We already do. The UK is one of the most business friendly, 'flexible-labour' markets, and deregulated environments in europe.

If we make it any more 'business friendly', we're going to have to abolish child protection laws.

And what, exactly, has sucking corporate cock for 30 years given us? Has it made everyone richer? Why is wealth inequality the greatest since 1920s? Why are the number of homeless people and people using soup kitchens exploding?

What we need is to lower corporate taxes and provide long term incentives for large companies to come set up in the UK.

No we don't.

It's not like businesses refuse to set up in the UK because it's such a highly regulated and hostile environment to business.

There is no problem with businesses setting up here, and the environment is one of the most business friendly in europe.

The problem is on the demand side, not the supply side. Try to help businesses by making it easier to fire people isn't going to help, for example. Businesses are not growing and taking on new people because we're in the middle of a recession and there is suppressed consumer demand.

Why would you grow your business when you're looking to downsize your business because demand can't keep up with the cost of running a business? That's why businesses aren't hiring, not because they think that they'll be stuck with the already most lax labour laws in europe.

What we need is to lower corporate taxes and provide long term incentives for large companies to come set up in the UK.

No we don't. We need to incentivise manufacturers who currently produce goods in the UK to stay here by taxing imports of a similar nature, and to promise those planning on moving production overseas will see their import duties double. Then put wages up. Even John 'Vulcan' Redwood argues that wages are too low. I need a scrub for agreeing with a Tory.

Anyone is any doubt can see the morning's GDP figures. This is no longer about multinationals, but about simpler stuff, about shrinkage blowing out the govt deficit. We need Plan B, and ideally C, D, E and F to follow, not just a lunge towards tax cuts for the rich.

It's not like businesses refuse to set up in the UK because it's such a highly regulated and hostile environment to business.

They don't 'refuse', they simply don't consider the UK at all. I've seen this plenty of times. When we bid for customer work, the company I work for can offer service from practically any country in the world. 9/10 customers choose not to come to the UK because of the costs involved. The only exception are government contracts. Even then we've got pockets of work where even the government have offshored parts.

To say it doesn't happen is simply adopting a head in the sand approach to economics.

At Nick, I agree on the fact we need to provide incentives to manufacturers as a priority. I don't agree that this incentive should be import taxes on competitive products. And as members of the EU and WTO our hands are fairly tied on what import taxes we can levy.

niceguy, do you mean labour costs? Again this is down to EU legislation...

sieglinde

niceguy, do you mean labour costs? Again this is down to EU legislation...

11% Employers NI is nothing to do with EU legislation.

'increase borrowing' The Guardian. Just like what bears do in the woods, and just as predictable.

As I understand it, a tax on imports, although it sounds promising, in fact has an effect equivalent to a tax on exports, which is hardly what UK manufacturers would wish.

So it's NI that's the problem and not wage rates? But NI is part of labour costs. Personally I loathe it because it's a huge lie. . I suppose it acts as
a form of corporation tax, though.

In our case it's all intermingled. Our UK costs of course will include labour, employer related taxes and margin (aka profit).

If our other costs are high this erodes/eliminates margin and we simply cannot compete with other countries. Work just passes us by. If we increase taxes on companies we just make them less competitive in the global market. And like it or not we operate in a global market now.

sieglinde

^So it's NI that's the problem and not wage rates? But NI is part of labour costs. Personally I loathe it because it's a huge lie. angry. I suppose it acts as
a form of corporation tax, though.^

It's a direct cost on hiring. If I want to hire someone on £30,000 a year, I actually have to find £33,300 a year, plus all the other costs. Paying ten staff median wages in the UK (about £25,000) will mean you're actually paying £27,500 in employers NI - the cost of a full worker just for the supposed privilege of hiring people.

It's such a dumb tax that I find it astonishing it's in existence at all.

Yes, I get all that, but since the current govt is so keen to reduce public spending while paying homage to bits of the welfare state where votes reside it seems unlikely they will abolish employers' NI contributions.

'niceguy'-

How do you come up with so much garbage? Are you a corporate shill or something?

Which part of what I said do you think is garbage?

I find it very interesting that you are so critical of the UK government and so vocal about what we should/shouldn't be doing despite the fact you don't even live here and presumably pay taxes here.

Well, I've pretty much debunked your nonsense about 1,000x over already with various links and statistics. It doesn't seem to stop you spouting the same old nonsense.

I may or may not be bothered to do it once again when I get home tonight. Not because I think it'll change your small-state obsessed mind, but because I don't think it's right that pernicious nonsense should go unchallenged.

btw: I do live here, have lived here for over a decade, and do pay taxes.