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Pre-Budget report is ‘panic response’ to financial crisis, say experts

(26 November 2008)

Leading Durham University economics experts have condemned the Government’s moves to stem the financial crisis.

The experts suggest the Pre-Budget report could make the situation worse, the proposed tax hikes possibly curbing spending for now. Dr Thomas Renstrom, Senior Lecturer at Durham Business School, said: “The pre-Budget report has the flavour of a panic response to the financial crisis. “The various measures have little economic foundation. Tax cuts funded by borrowing are likely to make the crisis worse, as the deficits have to be paid back through distortionary taxes in the future. He added that simply reducing interest rates is not an effective measure: “The Bank of England reducing the interest rates alone will not necessarily cause a reduction in mortgage rates or reduce the cost of borrowing for businesses. “The reason is that under the current arrangement with the Bank of England, the government cannot credibly commit to low interest rates in the future. If fuel and commodity prices were to rise again, those relative price changes would be misinterpreted as inflation, and interest rates would rise again.” He concluded: “The solution is to remove the inflation target in its present form. Only then will lower rates be credible.” Tony Cleaver, Senior Teaching Fellow in Durham University’s Department of Economics, Finance and Business said: “Everyone agrees that to avoid the worst excesses of impending recession a fiscal boost is needed – so an increase in consumer spending is the correct response to rapidly falling sales and gathering gloom in business expectations. “Since VAT is a tax on spending then this is the correct tax to cut now. Targeted support for low income families, who are unlikely to save, and direct government spending are also likely to help. “But the problem is reassuring financial markets that the government can afford it – hence the simultaneous announcement of tax rises and public spending cutbacks at some time in the future when recession recedes. Families might not go out and spend now if they are being told that taxes will rise later. “The other issue is that if there is any increased spending in Britain it might all go on imports and thus fill the pockets of foreign producers. Coordinated action on increased international spending is required so that some of their cash comes our way too. “The final irony is that it was excessive consumer spending that got us into the mess in the first place. People are saving in the UK since too many are in debt and credit companies are calling them to account so are they going to respond now to government tax cuts and hand-outs?”