From this morning's press it appears that the Conservatives are about to propose a change in economic policy. The new policy is to cut the growth in public expenditure (or perhaps even cut public expenditure in absolute terms). I suspect that there will be general relief amongst the media (who are eager to regard us positively, if they can) that we now have something that might be termed a "response" to the recession, and as a consequence we may not be subject to particularly close scrutiny on this concept for now. Nonetheless, not everyone will be lax, so here are a few questions to which we'd better have some kind of answer:
- Why now? We previously wanted to match Gordon Brown's public expenditure plans (which, having been lax for years, were fairly tough over the next few years - projected at only 2% growth - and are actually unlikely to be deliverable now, i.e. growth will be more rapid than this). Have we now changed our minds on this because of the recession, or is it just that we have come across some potential savings that we hadn't previously spotted? If the latter, we'd better be able to be very specific about them and about what's changed - unclarity isn't going to look good when we are changing tack (under heavy pressure). If the former, then we are saying that cutting public expenditure is an appropriate policy response to recession. Personally, I'm a bit mystified by that one, but perhaps there's an angle that we would get away with politically (even though it's not true and also not, as it happens, coherent economics) along the lines of "it's important to put more money into people's pockets in a recession to help them through; the best thing to do would be to be able to borrow to cut taxes; unfortunately Gordon Brown has "maxed out the nation's credit card" so it's not actually possible to borrow any more; hence if we are to cut taxes then we must cut expenditure." If we are going to run with this line (which seems to be the intention), then some other questions will follow.
- Is it true that it would be impossible to borrow more? I say no, but perhaps I'm wrong. I'll be keen to read our argument.
- Does cutting taxes have as big an effect if tax cuts are matched by public expenditure cuts? The standard view is that it doesn't, but perhaps that's wrong. Again, I'll be keen to see why.
- Do the gains from the tax cuts outweigh the losses from public expenditure cuts by more in a recession than in a boom? I suggest that this is doubtful, to say the least. But if such gains outweigh the losses by more in a boom than in a recession, then we should have been proposing these public expenditure growth reductions (or cuts) earlier, and there is no good reason to be offering them now. So we'll need an argument as to why I'm wrong.
- John Redwood says we can't afford to cut taxes if we are going ahead with the bank bailout. Why is he wrong? (Lilico opposes the bank bailout, also, and says that if it goes ahead then tax cuts may eventually have to be funded by printing money if we are to avoid deflation, but, mercifully for us all, precious few journalists care what Lilico thinks.)
- Is this just the first step - will further public expenditure growth cuts (or absolute cuts) be under consideration at later stages of the recession - or do you anticipate that this plan will be enough, in terms of the fiscal policy side, for the whole recession? I think they're bound to ask this one, and I have no idea what our answer is going to be.
I look forward to the detail when it comes. My guess is that we'll get away with this, politically. And that's the main thing for now. There's not that much gain from borrowing-funded tax cuts yet (the gains from that will start to come next year), and the money-printing tax cuts won't become necessary for perhaps another two years after that. So all that can wait until tomorrow, provided that we have something vaguely coherent to say for now, in political terms. And this probably does the trick - at least removing the sense that we didn't have any idea what to do. So I'm less unhappy than I was. I just wish they'd listened to me back in July - in which case they'd have been ahead of the game and we would have had the economic policy high-ground instead of Gordon Brown, rather than attempting catch-up. Perhaps next time...
