The Chancellor has set a monetarist course of cutting government expenditure by shrinking the size of the state. Pointless functions and organisations are axed and lots of jobs have disappeared. So big had the state become, it is inevitable that the shedding of its functions will reduce GDP. This does not matter, indeed it has to happen, so long as measures are introduced to boost the private and corporate economy. It may be that the Treasury has been over zealous axing some capital projects, rebulding schools perhaps and maybe Nimrod. Getting it right is near impossible, going in the right direction is compulsory. The Chancellor is going in the right direction. So far.
In his budget next month he has to be bold. Very bold. He must eye potential revenue as a prize, but he must separate reveue from rates. There are voices now being raised for tax cuts which can have real impact in not only boosting economic activity, but setting the enterprise which beats in every British heart free. In my book I argued for income tax reform involving a single rate, with all low paid removed from income tax altogether, up to earnings of £15000 p.a. I also pointed out then and later in this blog that for the level of government expenditure Labour constructed it had set tax rates too low, notwithstanding the drain on the private sector which had to pay for it. It was runnning a deficit even before the crash.
The Coalition is now on a robust programme to cut the vast harvest of willy nilly spending. It cannot simultaneously increase taxes on income and business because it will choke off expansion of the private sector. But it can cut them and it should. It can, by cutting tax immediately, increase consumer spending and business investment. This will provide a significant boost to the economy. Politically it will demonstrate a rounded policy of cutting the state and increasing private enterprise. In turn this reduces the deficit when in full motion, but, more important it remodels the economy on a dramatically better and more sustainable structure.
To succed the proposals must be bold, so that all at home can feel the freedom and outside investors see an opportunity. Increasing the personal allowance to £12000 p.a. (this would mean a couple earing jointly £24000 would pay no income tax), reducing corpration tax to 20% and 10% for small companies (the engine of the economy) would be a start. Shaving 2.5% off the top rate (in the long term a revenue negative tax, even if a political necessity when introduced) would give a signal that Britain is becoming, once again a very good place for business.
The spike in borrowing would be short lived. The economy would soon begin to show real growth. Remember manufacturing, from a very low base, is growing at record levels. These measures would help it take the lead in the drive for a better economy.
That done, George and Vince can fix the banks. The people will not let them fudge that task.