Britannia Radio

TELEGRAPH   30.10.08
Lord Lawson says tax cuts are not solution to slump
Interest rates must be slashed but the Treasury should refrain from 
cutting taxes in the face of the coming recession, Baron Lawson of 
Blaby has said.

By Edmund Conway, Economics Editor

The comments from the former Chancellor are particularly striking 
since he was closely associated with large and regular series of tax 
cuts throughout his time in office. However, he said interest rates - 
and not either Keynesian-style spending policies or major tax cuts - 
were the ideal tool to soften the economic slump.

Nevertheless, the recession will be "at least as bad" as the early 
1990s, if not worse, Lord Lawson added, calling for the Bank of 
England to reduce borrowing costs sharply from their current 4.5pc 
level.

Speaking at a House of Lords economic seminar, he said: "There is 
lots of bad news still to come and lots of bad debts yet to be 
revealed. I would be astonished if this is not at least as bad as the 
early 1990s. In fact I think it will be worse than that - and longer-
lasting."

The solution, he added, is "monetary policy, and very low interest 
rates which should be globally-concerted. A fiscal Keynsian boost 
would come too late and be damaging which would leave us with a 
hugely bloated public sector.
"Maybe you could bring forward some projects and allow people more 
time to pay taxes - but I wouldn't go for massive tax cuts. By having 
big cyclical tax cuts now you would weakening your weapons for the 
future."

A growing number of politicians and economists have suggested tax 
cuts as one of the remedies for the crisis, since spending on public 
works - the hallmark Keynesian-style policy - is slow to kick into 
action. With planning restrictions tending to hamper plans to build 
major projects, it can take many years for public spending to reach 
the real economy by creating jobs and generating demand.

Speaking at the same seminar, former Treasury adviser [1991-98] Lord 
Burns warned that the Government faced generating large and damaging 
deficits in the future years unless it restrained its spending.

He said: "I think that monetary policy ought to be used as the main 
weapon. Since the crisis we seem to have lost the notion of how much 
budget deficit needs to be. Each of the cycles that I have observed 
have ended up with very large budget deficits which have then taken 
four or five years to put right again."

The peers also warned that the forthcoming international summit held 
by George Bush next month would be a failure, since the ministers had 
still not concocted comprehensive strategies or policies about how to 
restructure the global financial system.

Lord Lawson said: "In my experience it is most unwise to call an 
international agreement unless you have already sewn up in advance 
before hand what you are planning to come up with - and I suspect 
that this is not the case here."
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BBC NEWS Blogs  29.10.08
How will the Chancellor repay debt?
. Robert Peston

The Chancellor has said that he needs the flexibility in the looming 
recession to spend and borrow more than would be possible if he 
adhered to the fiscal rules.

These are the strictures on how much the Government can borrow that 
were introduced in 1997 by Alistair Darling's predecessor as 
Chancellor, Gordon Brown.

The positive gloss Mr Darling put on this admission that those rules 
would be breached is that - with recession looming - only spending by 
government can compensate for a slump in spending and investment by 
businesses and households.

And more government spending would mean more borrowing and an 
increase in the national debt.

But Mr Darling also conceded in an interview with me - to coincide 
with his Mais lecture on "maintaining stability in a global economy" 
- that there's a negative side to the inevitability that the ratio of 
the national debt to our economic output is set to explode through 
the 40 per cent ceiling.

The current contraction in our economy means companies and households 
are paying less tax.

Stamp duty receipts have all but evaporated with the collapse in 
house sales.

And the appalling plight of banks and other financial firms is 
endangering 25% of all revenue from corporation tax.

So there's less revenue coming into the Exchequer just as it has to 
find extra money to pay benefits to those losing their jobs.
The criticism of the government therefore from the opposition is that 
it allowed the national debt to grow far too much in the boom years.

And it is a serious criticism, because when Gordon Brown introduced 
the fiscal rules all those years ago there no suggestion that they 
were only to be applied when the going was good.
Nor is this an academic criticism.

If investment institutions controlling billions of dollars aren't to 
shun sterling and the debt being sold by the Treasury - with the 
horrid consequence for the Government of a sharp rise in the cost of 
servicing that debt - the Chancellor has to explain how the fiscal 
rules would be changed to remain credible and how the national debt 
can be reduced to some kind of tolerable level after it rises 
significantly.

So what slightly surprised me when I interviewed Mr Darling is that 
he wouldn't even confirm that the fiscal rules will be reformed, 
rather than simply being conveniently ignored for a while.

There can be no doubt that he will have to reform the fiscal rules in 
a matter of weeks, and come up with a convincing plan to reduce the 
national debt as and when economic growth resumes - because in this 
economic age of anxiety, failure to do so would bring the risk of a 
dangerous run on the pound.
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POLITICS HOME 29.10.08
BBC News  at 1830 hrs
Darling: We are not going to apply fiscal rules rigidly
18:30 | 29/10/2008

Alistair Darling, Chancellor of the Exchequer
BBC News

Mr. Darling discussed the future of Labour's fiscal rules saying that 
they needed to be applied flexibly in an "unprecedented situation".

He said: "The rules which were to target debt levels and to protect 
investment are good rules.  They're absolutely sound.  But you don't 
want to apply rules in a rigid manner when the economy is slowing 
down under unpreceded conditions.  [This equals 'No Rules'  -cs]

"When you're going into an unprecedented economic situation, you've 
got to have the flexibility to support the economy as well as making 
sure you bring things into balance in the medium term.

"At this stage, the right thing to do is not to apply rules in a 
rigid manner, but instead to make sure we support the economy."
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Channel 4  News  at 1925 hrs
Osborne: Government has no plan to control public finances

George Osborne, Shadow Chancellor

Mr Osborne criticised Mr Darling's speech this evening for not having 
a plan to control public finances.

"Now they've abandoned the fiscal rules Gordon Brown based his 
reputation on, but Alistair Darling wont say what will take their place.

"What he should do is adopt our plan for an independent Office for 
Budget Responsibility, so that we start to restore confidence in the 
British economy."
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BBC News  at 1920 hrs
Hammond: A framework is needed to gain credibility in the markets

Philip Hammond, Conservative treasury spokesman

Mr Hammond criticised the Chancellor's decision to not apply fiscal 
rules rigidly, and that it had been expected that he would have "set 
out new rules."

"You've got to have a framework if you want credibility in the 
markets, astonishingly what he has done this evening is abolished the 
rules and put absolutely nothing in their place.

"You don't normally choose to go into this kind of a downturn with 
borrowing levels already this high - now having to layer on top more 
borrowing - that's what breaking their rules for them," he said.

He added: "We will have to wait until next months figures to see 
whether the bigger package has been able to restart mortgage lending. 
The signals from the market show we have not seen that yet."