Letter: Budget that achieves the worst of two worlds

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Sir: It is appropriate that Lord Lawson should be urging a tax rise on the Chancellor. Lord Lawson after all caused our present problems by cutting taxes so much that the fiscal gap has become almost permanent. The projections in the Red Book make this clear; even after sustained growth for three years the PSBR will still be around 4 per cent of GDP. Thus, howsoever burdensome the present Budget proposals, it is going to require much more drastic overhaul of the tax structure to alleviate the problem of the fiscal gap.

I would take issue with Christopher Huhne however about the spectre of Keynes (17 March). What has been done especially with regressive taxation is hardly Keynesian. It has been a common fallacy among commentators to identify Keynesian policies with those that increase the budget deficit. There is after all something called the balanced budget multiplier. In the present case, the need is for a boost to expenditure on employment-generating activities matched by a tax increase, so as to leave the PSBR position unchanged.

The Chancellor did not take this option. He is under the delusion that by having a neutral budget this year but increasing taxes next year he will not jeopardise the recovery. He must think that people have even less ability to see ahead than does the Treasury. By not helping the recovery but forewarning about future taxes, he may have achieved the worst of both worlds. Spending will be postponed further by the consumers and the Emarkets will restrict the room for further cuts in interest rateTHER write errors.

Yours faithfully,

MEGHNAD DESAI

Director

The Centre for the Study of Global Governance

London, WC2

17 March

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