Britain sits on the periphery of Euro-Zone and US economic woe and although these hinder domestic growth, well targeted fiscal and monetary injections can help to ease the pain while we wait for favourable trade winds to return.
Although, the markets appreciate the clear economic guidance provided by the UK government, compared to the muddled Euro-Zone road map, the fiscal squeeze is taking its toll and some small adjustments would certainly help as investors struggle to fathom what future lies ahead for the UK’s biggest trading partner.
As Keynes said, “When the facts change, I change my mind. What do you do, sir?”
When the UK government drafted its austerity package, it cannot have imagined the mess the Euro Zone is currently in nor could it have believed that the US would still be searching for an economic boost. These two usually dependable trade winds have failed to arouse much more than an idle flap from Britain’s economic sails and without them, it will be hard for the UK to build up a head of steam whatever policies the government implements.
However, in such cantankerous times, talk of cutting the 50p top rate tax should be put on hold, for despite its relatively benign revenue, there are surely much better ways to boost domestic demand. The government should learn from the US that cutting tax on the country’s wealthiest rarely produces a significant boost but instead creates ammunition for critics.
Targeting middle to lower income earners with a tax break rather than a flat VAT cut would be a much better way to boost consumer demand. The aim would be to get more money flowing through the high street’s tills, increasing corporate profits and accelerating the velocity of money through the economy.
Furthermore, as David Blanchflower, former member of the MPC, suggested recently in the New Statesman, the Bank of England should implement credit easing rather than quantitative easing, targeting small and medium businesses struggling to find financing rather than the banks. Small and medium sized businesses have much more trouble accessing credit than larger firms and the allocation of financing to these businesses would create a much needed boost to the economy, not only in the short term but also longer term because it would allow firms to invest in the future.
This is not an attack on banks but banks have much wider access to funding and the Bank of England can implement liquidity injections into the interbank markets to ease constrained liquidity when needed. A permanent QE cash injection may help to some extent, but much of the cash will be retained by banks as exposures to Euro-Zone risks cause them to put money aside for a rainy day.
A combination of these fiscal and monetary policies can help support the areas of the economy most in need as well as improve conditions for job creation while the world continues to wait for plausible action from the Euro Zone.