The growing difference between what the Office of Budget Responsibility anticipated as our path from recession, and what has actually happened causes me increasingly substantial concerns. Our response seems to be an insatiable appetite to reach for ever more expensive monetary instruments to kick-start our failing growth strategy – but the sums involved are terrifying in magnitude. Yet progressive increments of monetary indulgence have not worked to date, and there is little encouragement on the horizon. Inflation is not the way out of our current crisis, and we should not restrict ourselves solely to using monetary devices whose use may inhibit a sensible, balanced policy response.
Following last year’s General Election, the country faced a dreadful crisis in monetary, fiscal and financial terms: inflation was well below target; the budget deficit was of eye-watering proportions; and the banks were feeble and hesitant. Last June’s emergency budget removed us, temporarily, from the danger zone, and the Chancellor’s numbers were finely judged to avert cataclysm. Yet, fifteen months on, the crisis is every bit as profound, as we teeter on the brink of a double-dip recession. With just a few weeks before the Chancellor’s Autumn Statement, I hope that the Government will prove how alive they are to our current predicament, and take the cautious steps to provide additional relief.
Labour’s answer has been to call for a slower timetable in reducing the deficit, alongside unaffordable generic tax cuts: these demands are irresponsible and serve to prove that they wish to ignore the problem and hope that it takes itself away. But their shrieking for blunt, populist fiscal measures are proving a distraction from the argument which many of us wish to make about a more nuanced role for fiscal policy. Yes, tackling the deficit needs to be a major priority – as does bringing inflation back under control and fixing the troubles of our banking system – but we should be alive to the way in which careful, targeted tax measures could stimulate growth without creating additional burdens on the economy.
Our problems have been made worse by the sluggish response of global markets: we have not managed to increase our trade volumes to the extent anticipated. The export-led recovery has stuttered, and risks grinding to a slow and painful halt. Few would envy George Osborne the task that he faces, but this Autumn Statement is a real opportunity to make a difference – and our prospects for economic growth hang on the decisions that he makes.
I want to see the Government take seriously the contribution of using the tax system to create the space to allow businesses to prosper and for consumers to consume. Part of the problem is a question of wider confidence, but that is not likely to be overcome with households retrenching in the face of crippling taxation and ever-rising prices, particularly on the commodities that we are most dependent on and consume most often.
Neither is it true to say that all tax measures that we could take would add to the tax burden: notwithstanding the need to control public spending very carefully, some targeted tax interventions would generate revenue for the Exchequer. For example, the Federation of Master Builders has long campaigned for a reduction in the rate of VAT on home repair, maintenance and improvement work: they estimate that a five per cent cut could deliver a total stimulus to the economy of around £1.4 billion in the first year alone – at a cost of between £102 million and £508 million. They predict that this measure would create around 34,5000 new jobs in the construction sector and 81,5000 jobs in the wider economy by 2019.
This crisis started in the housing market, and we have got to address the problem that remains there. The number of mortgage approvals has fallen dramatically and mortgage lending has dropped to their lowest levels since records were first collected. The difficulties which first-time buyers are facing are reverberating through the housing market, and stifling other improvements. We need the banks to be more alive to the pressures facing first-time buyers, and I would hope that the Government would consider a sensible approach to help those trying to buy their first home. The cost of operating the Mortgage Interest Relief at Source scheme was estimated by the Council of Mortgage Lenders to be between fifty and eighty million pounds each year. We were promised that its withdrawal would contribute to long-term stability of the economy – but that has not happened. I believe that the re-introduction of MIRAS to first-time buyers for a period of five years would help deliver that stimulus. I believe that we stand more chance of getting the banks lending again if we can get the housing market moving – and President Obama has introduced a mortgage tax relief scheme for homeowners in the United States.
Using the tax system to help add weight to our growth strategy need not be seen as surrender towards the Keynesian school of economics: but relying wholly on monetary measures to deliver carries greater risk of failure. Why not use all the tools in the box – especially when the monetary response has proven so unconvincing? The Autumn Statement provides that chance to fine-tune our response to the disappointing global conditions which have held us back: and we need to be focused on kick-starting the growth whose contribution to recovery so far has been negligible.
Our response needs to be grounded in the real world: quantitative easing is not an option without cost, and deciding the appropriate balance will involve judgements about the value of different interventions. In that context, I believe that it is not a question of whether we use the tax system to help deliver that much-needed growth, but when. I do not believe that we have the luxury of time to wait – and we cannot afford the alternative.