Economy: ‘Endorsing Tax Cuts’…

FINANCIAL CRISIS & THE REAL ECONOMY

RESPONDING to Vincent Cable MP (Liberal Democrats) after an article appeared on the website of the Guardian Newspaper, dated Tuesday 18 November 2008, entitled “Get the financial plumbing working“

Mr. Cable writes:

… “Tax cuts may help, and after the recession we must get a grip on public debt, but the priority now is to get banks working again.”

… “The financial crisis is now hitting the real economy where it really hurts. After over a year of dramatic but somewhat remote events in the banking system, we are seeing the consequences with thousands of jobs lost every day and hundreds of companies closed every week.”

ECONOMIC STAGNATION

Yes, as the financial crisis flattens, the effects were always likely to be sharp on domestic economies. The rapid growth in unemployment is a serious political and economic issue, particularly as the economic recession is likely to be deep and protracted.

The credit crisis, largely stimulated from sub-prime lending – large mortgages offered to individuals with little or no capital and those bank risks hedged against complex financial instruments like derivatives – was a disaster waiting to happen long before it did because many of those bankers trading such products either lacked in-depth knowledge of the instruments they were dealing with or, as is becoming notorious, the market itself lacked sufficient regulation in curbing irresponsible banking behaviour.

But, to stimulate borrowing again, which the economy so depends upon, reform of the banking sector needs to be quick and decisive: recommendations, for example, concerning how banks use ratings agencies have been buffeted around now for some weeks, yet still the market awaits and financial dealings stagnate. G20 highlighted the need in its closing communiqué to find a solution where markets are accessible without un-necessary regulation which, otherwise, would have an adverse effect on national economies. Yet, banks remain in fear of lending to virtually anyone with the risk that any loan made might be written-off as bankruptcies and personal insolvencies soar.

Because of this, I believe the government is right in seeking short-term tax cuts because it appears that is only one of few options remaining in kick-starting the economy. Give people more by way of disposable incomes, i.e. by reducing taxation, will always likely lead to a greater consumer spending round. Rather than worry, anxiously, about higher taxes in the future which seem inevitable, the political and economic priority, now, is generating demand that will keep people in, and not out-off work. If the banks are unwilling, even given their substantial rescue packages, in stimulating economic growth, then the government, in these uncertain times, must act as they have done. A fiscal stimulus is urgently required in helping all parts of the economy because without it, further hardship would be inflicted upon people and families caught-up in a system not of their making.

 

© Mark Dowe 2008: all rights protected

mark.dowe@googlemail.com

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