We can't afford not to cut taxes


Eamonn's in Comment is Free today, giving his take on yesterday’s GDP growth figures, which said that the economy grew by 0.5% in the first quarter of 2011:

Still, if you believe the figures (which you shouldn't), the economy has been pretty well flatlining since last summer. And all those dreaded spending "cuts" (really just reductions in the rate of spending increases) have yet to come in.

This is important to remember. 0.5% is a pretty lousy growth figure, well below the government’s own estimates, but it can’t be attributed to the cuts. As Fraser Nelson pointed out in a very important post yesterday, the amount that the government plans to cut is relatively small: just 0.6% of total government expenditure over the current financial year. In fact, the government will cut less in the next four years than Denis Healy did in just one year, after the IMF came in. No, we’re not in IMF territory. But people on both sides of the debate should remember the comparison – the cuts are not the radical state-cutting that both the government’s critics and many of its supporters claim. Unfortunately.

Cutting spending will help the government’s finances, which is good, but it won’t do much for growth. And contrary to most people’s assumptions, I doubt it’ll hurt growth either, except possibly in nominal terms. The government needs to create more hospitable conditions for private enterprise to create economic growth. As Eamonn says:

We need to energise the "growth agenda". If every small business took on just one extra person, we'd wipe out unemployment. We have to slash the workplace regulation that discourages hiring. We need government to commit itself to cutting its costs and lowering taxation year on year. Only that will give people the confidence to start hiring and expanding again.

Simple things like tax cuts and regulatory reforms would make it a lot easier for businesses to operate. On the margin, making business more profitable and easier would mean that more businesses would be set up and fewer would fail. Regulatory reform is a depressing topic, because it offers a zero-cost way to help business that most governments refuse to touch for political reasons. But can we afford tax cuts? Many say no. This is curious, given their enthusiasm for debt-funded stimulus spending. And it’s wrong: as the weak growth of the last 12 months has shown, we can’t afford NOT to cut taxes. If that means cutting spending more deeply and quickly, so be it. The alternative is a lost decade of stagflation or, when the eurozone dominoes finally fall, the depression that we thought we'd avoided.