Greg Clark MP: Some questions for Ed Miliband about his “temporary rise in borrowing”
Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.
Three 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.
Sure 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.
If 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.
It 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.
Why was Labour's novel reasoning entirely absent when the party opposed the reduction in the top rate of Income Tax?
If 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 everything.
How 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 more?
Furthermore, 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.
Of 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.