The Pre-Budget Report: Will it stimulate?
In the highly technical world of fiscal stimulus analysis, we often have to pay due regard to the ‘oomph quotient’: a precise measure of how stimulating any package is. The US stimulus package announced earlier this year was very oomph worthy. As I wrote on this blog some time ago, the US Government sent £85 billion worth of tax rebate cheques to 130 million taxpayers. Those cheques were worth on average £650. That initiative bought the US a quarter of unexpectedly high growth.
Times have changed since then with the very severe drying-up of bank lending and so any new stimulus package would have to take account of that rather than just go through the route of boosting consumer confidence and spending. So the Chancellor today split his multi-billion pound stimulus between changes to personal tax and benefits and extra funds for infrastructure projects and help for business.
On the business side, the great bulk of the help comes through a package worth £7 billion to offer new credit lines to SMEs and a lightening of their tax burden (a fair whack of this will come through the European Investment Bank rather than directly from the Government). There’s another £4 billion of public money for infrastructure, environmental and housing projects.
On the personal tax and benefit side, there are some rises in state pensions, pension credit and child benefit and the rises in tax credit planned for 2010 will now occur in April 2009. But the Chancellor has decided to hang the vast bulk of the stimulus through the tax system on the 2.5% cut in VAT which will cost £12.5 billion.
In effect, the Government is stepping in with public funds to make up some of the shortfall in bank lending to business while trying to boost consumer spending and confidence with the cut in VAT (this may also help some businesses as well).
My sense is that the business measures will be useful and will keep a number of businesses going and keep people in jobs. But it is clearly a stop gap until such time as the Government works out how it is going to get the banks lending again. Time may have been brought through Christmas but if the credit does not begin to flow again soon after December’s interest rate cut, then January will be a very interesting month for the relationship between Government and the banks. The Chancellor’s statement today that he will take “whatever action is necessary” to ensure banks treat business customers “fairly and decently” is a very clear warning.
On the consumer side, I must admit to being rather sceptical about the VAT cut. Most consumers will be pretty underwhelmed by this. Its biggest impact will be on expensive goods such as cars and electronic items but psychologically I think people are turning away from such purchases and a small cut in VAT will not make a huge difference to their decisions. The necessities that people cannot avoid such as food, kid’s clothes and utility bills do not attract the normal level of VAT or VAT at all and so this will not encourage them to spend more there. The most one can say is it might push up levels of spending during Christmas as consumers potentially opt for a bit more of a splurge on gifts and restaurants.
The newspapers will also lead heavily on the rise in National Insurance. Although this won’t happen until April 2011 while the VAT change will happen in a few days, it may make many feel that they will be no better off under this deal.
So in the end I think this PBR does not score high on the ‘oomph quotient’ but it does steady some nerves at a time of growing business panic. Such an achievement is not to be sneezed at in these fractious times but my guess is that if the credit taps are not turned on very early next year, we will need and probably see some even bolder steps being taken.
Over and above that, and as I said elsewhere, the decision to pay for some of this through changes to the tax rate and personal allowances for those earning over £150,000 plus the decision to review the operation of UK-linked tax havens is a real sea change in British politics which puts the fairness of our tax system absolutely centre stage. A bold move which I think will turn out to be popular. If the Chancellor could see his way to toughen up some of that approach in order to generate revenue rather than go ahead with the NI rise by the time of the Budget, he’d be on to more of a winner.