Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.
weeks ago I
wrote about Labour’s refusal to say whether they would borrow beyond the
Government’s plans or not. As I said, this is an extremely basic question
about economic policy – and the Official Opposition really ought to have an
answer to it.
enough, a few days later, Ed Miliband had a farcical interview with Martha
Kearney on the World at One, during which he claimed – when tackled on the
issue of Labour’s proposed VAT cut – that cutting government revenue would not
require the government to borrow more. The next morning, on
ITV’s Daybreak, he had to execute a volte face and admit that Labour
planned “a temporary rise in borrowing”. But far from clarifying the issue,
this latest twist begs a host of further questions.
of all, what does he mean by a “temporary rise in borrowing”?
you don’t have a plan to pay it back, the additional £12 billion of borrowing
is permanent. It increases the national debt, which has to be serviced with
interest payments until it is repaid. For the rise in borrowing to be temporary
it would require an identified means to repay it. No such means is identified.
could be that Miliband is assuming that a cut in VAT would so stimulate the
economy that the additional revenues and savings to the public purse would be
sufficient. Does this mean that Labour have been converted to the idea of the
Laffer Curve? If so, on what basis do Labour assume that a cut in VAT would
stimulate revenue-generating activity equal to its cost? In fact, for a VAT cut
to pay for itself in the medium term the multiplier would have to be a full
seven times bigger than that assumed by the Office of Budget Responsibility.
was Labour's novel reasoning entirely absent when the party opposed the
reduction in the top rate of Income Tax?
tax cuts can pay for themselves over the near-term clearly envisaged by Labour,
then why stop at VAT? Indeed, why stop at tax cuts when, by Labour’s logic,
spending increases could be funded in the same way? After all, Labour have
opposed almost every single saving made by the Government since it took office,
but they haven’t said how they would have avoided these spending reductions.
Presumably a “temporary increase in borrowing” is now Labour’s answer to
long would the cut in VAT last? (Which is the same as to ask: how much would
the national debt be increased by?) Ed Miliband said it would be a year or so,
but what determines that? Does it depend on some indicator in the economy?
Could the duration be two years and the cost, therefore, £24 billion – or even
one has to ask whether there is any limit to the extra borrowing Labour would
recommend If a limit is envisaged, then what is it? We don’t need an exact
figure down to the last penny. Just a rough idea – say to the nearest billion.
That at least would provide some sort of yardstick by which the markets could
judge the consequences of Labour’s policy.
course, it took three years just to get any sort of answer to the question on
VAT. So at this rate, even answering these dozen further questions means we can
expect to have a proper account of a basic Labour economic policy by the year
2049. We can hardly wait.