Keynesian theory suggests that public spending ought to be counter cyclical- so during a recession we should run deficits to keep up public spending whereas when the economy grows we should run a surplus.
Most self proclaimed Keynesians only support the first part of that equation and also favoured ever rising public spending during the boom years. When Gordon Brown during the first four years as Chancellor, ran a surplus he berated by pundits and politicians in his own party for being stingy (after 2001 he turned into the spendthrift idiot we know and love).
However despite the political difficulty of running a surplus during a boom the basic theory makes sense. Which is why I am beginning to wonder whether it is time for a cut in VAT* to pump up the economy.
A cut in VAT would not undermine the ongoing project of reducing the rate at which government grows- but it would have an immediate effect in terms of boosting consumer spending.
* Of all the proposed stimulus methods, only a tax cut makes sense to me- as Barack Obama found during his stimulus programme- there are no "shovel ready" government programmes that can be started quickly enough to boost growth.
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1 comment:
I'd say it is better to cut income tax than VAT.
Harmfuless of different taxes to economic activity, in increasing order:
1) Property taxes (land value tax)
2) Consumption taxes (VAT)
3) Income taxes
4) Corporate taxes
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