Treasury argues for tax cuts

Factory in UK Tax cuts aim to promote economic activity

Last night the Treasury published a two-page summary of new analysis it has carried out on the "dynamic" effects of cutting taxes.

What it shows, says the Treasury, is that the cuts the chancellor has made, and is still making, to the rate of corporation tax will, over 20 years:

a) increase the long-run level of GDP by between 0.6% and 0.8%

b) and boost business investment by between 2.5% and 4.5%

c) such that between 46% and 58% of the initial loss of revenue to the Exchequer will flow back from taxes generated by the increased economic activity.

It is an argument that says tax cuts make us all richer, by promoting economic activity, and they do less damage to the public finances in the long run than the traditional "static" modelling of their impact would imply.

Now I can't judge the robustness of these calculations, because the full report is not yet available - and will be published later this morning alongside George Osborne's Autumn Statement.

But the underlying argument, that tax cuts boost economic activity, is not contentious. Where the debate will take place is over the Treasury's estimate of the amount of incremental tax revenue generated by the increased economic activity.

Some zealots for low taxes would argue the Treasury is being too conservative, and that the Treasury is bound to get back 100% of all the initial lost revenues; they would accuse Osborne of being intellectually imprisoned by the risk-averse Treasury.

Others, on the left, would see these arguments as convenient excuses for the chancellor to cut the tax burden on his friends in business.

You will know which side of this fence you are on.

But there are a couple of interesting things to say about the fact that the chancellor has ordered this analysis.

First, if the approach were adopted for modelling the impact of tax cuts and rises on the broader economy and public finances in Autumn Statements and Budgets, the chancellor would presumably hope to create a climate of opinion favouring tax cuts over tax rises.

And this, perhaps, would be only partly ideological: it would be to catch up with what the Congressional Budget Office already does in the US; and, if done consistently, there would be occasions when such modelling would show that incremental public expenditure, on infrastructure, for example, would do more to boost economic activity than some kinds of tax reductions.

Second, it looks to me something of a signal, a softening-up or confirmation, that we will have a steady-as-we-go Autumn Statement today - no massive tax or expenditure changes - in the hope and expectation on the part of the government that the UK's strongish economic recovery will be sustained, such that George Osborne can promise substantial tax cuts shortly before the 2015 general election.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 182.

    "164.Lizard Point
    [Re laffer curve]
    I always found this concept "Lafferble" as the ability to dodge tax should be removed, not allowed for in Government proposals."

    Apart from the impossibility of your wished-for socialist panacea, it also translates as totalitarianism. no surpise there.

    Tax havens, & tax dodging are desirable, as they counterbalance government greed/shakedowns.

  • rate this

    Comment number 181.

    Taxation is a form of mafia-style protection racket: pay up or jail, we'll "protect" you if you pay.

    We live in a fool's (Socailist's) paradise that everything can be paid for by HMG or debt & no need for individual responsibility. So called "Austerity" is merely a return to the sanity of living within our means. Good on George. Keep shrinkng Blairs's, Brown's and Balls' bloated state monolith.

  • rate this

    Comment number 180.

    Why is pumping money into the economy as tax cuts good for growth, but doing the same amount as welfare spending bad for growth?

    If anything it's the opposite. Welfare is going to be spent on consumer goods & services. Tax cuts are as likely to go into savings - possibly offshore - and debt reduction. For an immediate economic boost welfare wins hands down.

  • rate this

    Comment number 179.

    Bribing us with Tax cuts in 2015
    They seem to think that all British people are selfish and greedy.
    They believe the British would rather pay no Tax at all and privatise everything, maybe a scratchcard to pay for any military ventures.
    The British are better than this.
    They wouldn't want the streets full of sick uneducated unemployed beggars Would they ?

  • rate this

    Comment number 178.

    The conservatives are really the nasty party who truly only represent the priveleged,money elite.
    5 more years of austerity ,zero hours contracts, and work until drop for the rest of us then.
    Pity the children of the 70s/and 80s who have to work until their bodies and minds are knackered.
    This government is truly representative of victorian times. Get thee. to the workhouse is their motto.


Comments 5 of 182


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