Ares
22nd June 2010, 05:11 PM
Osborne's Anti-Keynesian Budget
George Osborne presented the U.K. government's emergency budget yesterday, with spending cuts and consumption-tax hikes intended to shrink public borrowing to 1.1% of GDP by 2016, down from 10.1% of GDP this year. Nearly 80% of that retrenchment comes as spending cuts rather than tax increases. The Chancellor of the Exchequer's cuts are, on balance, good news for the British economy. Even more welcome, though, is that Mr. Osborne's budget is the latest to depart from the short-lived Keynesian consensus that government can spend its way back to prosperity.
Lord Keynes once famously said that in the long run, we're all dead.
Now the tide may be turning. U.S. President Barack Obama could find himself in a lonely spot at this weekend's G-20 summit, when he's expected to urge his counterparts not to tighten fiscal policy too quickly lest they thwart their economic recoveries. With Japan's recent move to slash its astronomical corporate tax rate, and Canada set to gun for aggressive public-sector deficit reduction this weekend, we can now add Britain's leaders to the growing list of politicians likely to ignore Mr. Obama's warnings. And rightly so. Aside from ballooning national debts, taxpayers in the U.K. and U.S. have little show for the billions in so-called "stimulus" spending the past two years.
Acting Labour Party leader Harriet Harman remains in Mr. Obama's camp; she warned Tuesday that Mr. Osborne's moves will "throw people out of work" and "hold back economic growth." In fact, his plans to slash items such as child welfare and maternity payments, and to chop £44 billion per year from departmental budgets, will allow the government to drop its corporate tax rate to 24% by 2014 from 28% today. Making it cheaper to do business in Britain and increasing the prospect of economic growth is what will improve long-term prospects for parents' and laid-off civil servants.
True, the corporate-tax rate could be lowered further and faster, and hiking the capital-gains-tax top rate to 28% from 18% will do nothing to promote investment. Mr. Osborne's budget seems to recognize this, allowing the "entrepreneurs' relief" rate of 10% to apply to their first £5 million in gains, from £2 million previously. Then again, the Conservative Mr. Osborne's coalition partners, the Liberal Democrats, wanted to raise capital-gains rates to a suicidal 40%, so we'll take his proposal as a supply-side victory of sorts.
The Tories did give in to the Lib Dems' fetish for narrowing the tax base by exempting an additional 880,000 people from paying any income tax at all. At the same time, Mr. Osborne's budget will raise the value-added tax to 20% from 17.5%, a burden likely be borne disproportionately by the less well-off. Shifting the tax burden to consumption from labor and profits can be beneficial, but raising the personal allowance does little to change incentives to work and invest.
Mr. Osborne's budget gives Britain a fighting chance to return from the economic brink. Fewer government handouts may well drag on bottom-line GDP growth in the short-term; but if Westminster stays on current course, that will be more than compensated for by real, private-sector expansion. Only economic growth will create wealth, rather than recycle and redistribute what others are struggling to earn. Mr. Obama may preach the old Keynesian stimulus gospel at this weekend's summit, but it seems clear that his audience already has decided to move in a different direction.
http://online.wsj.com/article/SB10001424052748704853404575322651850598306.html?m od=googlenews_wsj#articleTabs%3Darticle
George Osborne presented the U.K. government's emergency budget yesterday, with spending cuts and consumption-tax hikes intended to shrink public borrowing to 1.1% of GDP by 2016, down from 10.1% of GDP this year. Nearly 80% of that retrenchment comes as spending cuts rather than tax increases. The Chancellor of the Exchequer's cuts are, on balance, good news for the British economy. Even more welcome, though, is that Mr. Osborne's budget is the latest to depart from the short-lived Keynesian consensus that government can spend its way back to prosperity.
Lord Keynes once famously said that in the long run, we're all dead.
Now the tide may be turning. U.S. President Barack Obama could find himself in a lonely spot at this weekend's G-20 summit, when he's expected to urge his counterparts not to tighten fiscal policy too quickly lest they thwart their economic recoveries. With Japan's recent move to slash its astronomical corporate tax rate, and Canada set to gun for aggressive public-sector deficit reduction this weekend, we can now add Britain's leaders to the growing list of politicians likely to ignore Mr. Obama's warnings. And rightly so. Aside from ballooning national debts, taxpayers in the U.K. and U.S. have little show for the billions in so-called "stimulus" spending the past two years.
Acting Labour Party leader Harriet Harman remains in Mr. Obama's camp; she warned Tuesday that Mr. Osborne's moves will "throw people out of work" and "hold back economic growth." In fact, his plans to slash items such as child welfare and maternity payments, and to chop £44 billion per year from departmental budgets, will allow the government to drop its corporate tax rate to 24% by 2014 from 28% today. Making it cheaper to do business in Britain and increasing the prospect of economic growth is what will improve long-term prospects for parents' and laid-off civil servants.
True, the corporate-tax rate could be lowered further and faster, and hiking the capital-gains-tax top rate to 28% from 18% will do nothing to promote investment. Mr. Osborne's budget seems to recognize this, allowing the "entrepreneurs' relief" rate of 10% to apply to their first £5 million in gains, from £2 million previously. Then again, the Conservative Mr. Osborne's coalition partners, the Liberal Democrats, wanted to raise capital-gains rates to a suicidal 40%, so we'll take his proposal as a supply-side victory of sorts.
The Tories did give in to the Lib Dems' fetish for narrowing the tax base by exempting an additional 880,000 people from paying any income tax at all. At the same time, Mr. Osborne's budget will raise the value-added tax to 20% from 17.5%, a burden likely be borne disproportionately by the less well-off. Shifting the tax burden to consumption from labor and profits can be beneficial, but raising the personal allowance does little to change incentives to work and invest.
Mr. Osborne's budget gives Britain a fighting chance to return from the economic brink. Fewer government handouts may well drag on bottom-line GDP growth in the short-term; but if Westminster stays on current course, that will be more than compensated for by real, private-sector expansion. Only economic growth will create wealth, rather than recycle and redistribute what others are struggling to earn. Mr. Obama may preach the old Keynesian stimulus gospel at this weekend's summit, but it seems clear that his audience already has decided to move in a different direction.
http://online.wsj.com/article/SB10001424052748704853404575322651850598306.html?m od=googlenews_wsj#articleTabs%3Darticle