1) Daniel Finkelstein may be correct to think that there are believers in "punk tax cutting" - "cut taxes immediately whatever the economic circumstances, sacrifice any other policy objectives to tax cutting at all times, and treat the announcement of future big tax cuts as the only ideological test that matter" - but I am not one of them. Indeed, I have repeatedly said I thought the not-properly-funded tax cut promises of 2001 and 2005 were a mistake and until July this year I was arguing that we should not have a policy on tax, per se, at all!
2) Lord Lawson, Lord Lamont, and the Conservative Front Bench are entirely correct to suggest that monetary loosening and the use of "automatic fiscal stabilisers" are (at least in the first instance) the best way to deal with economic downturn. Indeed, up until just over a year ago the orthodox position would have been that these were the best way to deal with any conceivable downturn in the developed world.
3) The only case I accept for more active fiscal policy than the use of automatic stabilisers relates to a twofold concern that (a) financial market problems in this downturn will lead to impaired ability to borrow; and (b) that the ability of the authorities to actually deliver monetary loosening will be limited by (i) the problems in financial markets meaning that interest rate cuts do not translate into cuts in market interest rates; and (ii) that the necessary cuts in interest rates will take them down to effectively zero, leaving nothing more for interest rate cuts to do and necessitating the resort to (largely untried) alternative methods of injecting money into the system, unless the monetary injection comes in a fiscal form (e.g. by cutting taxes and printing money to fund government expenditure).
The implication of the above is that my borrowing-funded tax cuts approach and the (in my view misguided) bank bailouts were partial alternates (the bank bailouts are intended to reduced financial market impairment). I don't believe that these bank bailouts are guaranteed to remove all impairment, and I also do not think they have any real chance of preventing deflation (a more probable scenario is that deflation wipes out whatever beneficial effects these bank bailouts might have had).
4) Their noble Lordships and the Conservative Front Bench are quite wrong to suggest that greater fiscal restraint at this stage will leave more room for more rapid interest rate cuts. The Bank of England will cut interest rates regardless of the fiscal policy stance. The Bank of England's (dire) concern is avoiding deflation. Inflation is yesterday's story (so fiscal stimulus is irrelevant there) and I do not believe there will be any material difficulty for the UK in funding gargantuan budget deficits if they arise from tax reductions (the story might be different if they arose from public expenditure rises, as financial markets would worry that large public expenditure rises would undermine the longer-term growth rate of the UK and hence its ability to service the debts - the same is not true of tax cuts). It is true that the huge liabilities associated with the banking bailout could in principle mean that the UK at some point has funding difficulties - but that's an argument against the bank bailout, not against tax cuts. If we really must do the bank bailout, and as a consequence end up at some later point with a funding problem, then we can under-fund public expenditure (i.e. print money). In a deflationary scenario we want more money in the economy, so that kind of under-funding (though far from ideal) would run only limited risk of resulting in runaway inflation (whilst not doing so would run the much worse risk of runaway deflation).
5) The tax cuts I propose initially - of the order of £30bn - would not be introduced until next year (so we would have most of the interest rate cuts in place already), but would only be the appetiser. I envisage larger tax cuts being necessary later once deflation gets hold.
6) The argument offered by many commentators against a public works programme and in favour of tax cuts is that a public works programme would only come into effect as the recession is ending, and hence be pro-cyclical. In my view the economy would not have been in a healthy recovery phase by the time a public works programme could be starting to take effect, and hence this argument is only half right. But it is half right in that tax cuts will come quicker - and indeed their speed is one reason to try my appetiser cuts now.
7) Some commentators suggest that tax cuts might just be saved. They are right. In that case there was no financial market impairment and no liquidity constraint associated with deflation in the presence of over-leverage. So fiscal policy injections had no especial value. That means it was even better to have used the tax cuts approach rather than the public works approach (for a pointless tax rebate can always be taxed back later, but once the money has been spent pointlessly then the resources have been used - they're gone). Fiscal policy injections in this scenario do indeed run a material risk of achieving nothing and just building up debt. That is an argument for their lower-risk form: tax cuts.
8) I favour borrowing-funded tax cuts now and have suggested that tax cuts funded by public expenditure cuts don't really represent a macroeconomic policy response to this recession. That doesn't mean that I oppose greater public expenditure control. It just means that I would favour that even if we weren't in recession.
9) I have said I think that an Austerity approach is a mistake. But if those that oppose my tax cuts approach really believe that the UK would find it difficult to fund vastly increased borrowing, even in a deflationary depression of the sort that is imminent, then I suggest they think about the Austerity approach a little more. The great virtue of the Austerity strategy (which might most naturally have been coupled with no banking bailout - i.e. have been the full-blown Andrew Mellon approach) is that the UK minimizes its risk of sovereign default. If you really believe that the enormous increases in the UK government's liabilities - on a scale of tens and hundreds of percent of GDP - associated with these bank bailouts means that the UK cannot afford even to add three or four percent to GDP by way of tax-cut fiscal injection, then we are in dire straights and probably ought to be thinking about general belt-tightening even if it means a 10% fall in GDP.
10) The Conservative Party is clearly trying to manoeuvre itself into a position in which it is seen to favour tax cuts now. As I have said before, I believe that it will eventually have to offer unfunded tax cuts later, whether it likes it or not. I believe that if Gordon Brown had been replaced the government would already be offering tax cuts. Even Brown may offer some token cuts soon. In economic policy terms we don't need tax cuts yet (even my own approach involves pre-announcing rebates to be paid in the middle of next year) and it makes perfect economic sense to see how interest rate cuts do for a few months first. But politically I believe the Conservative Party is allowing itself to be badly outmanoeuvred, and is perceived by the public as having no answer to recession and by journalists to be offering only token responses. Brown is now making the political running on the economy. How could we let the incompetent dull villain turn into the all-powerful imaginative super-hero? Are we now relying on human misery in the recession to win us the election by default? Is that really the best we can do?
