Can we afford £7 billion of tax cuts?


I welcome both tax cuts announced by the Prime Minister for the next Parliament. I think it quite easy to answer Labour’s query, how will they be paid for? The answer incidentally will be set out in detail later this autumn when we see the next set of forecasts for spending and borrowing from this government which will give us revised base figures.

The Conservative leadership has ruled out one of the three possible ways to pay for the Income tax cuts – tax rises elsewhere. That leaves two ways to  pay for them – rising revenues from economic growth, and declining public spending.

These tax cuts are not like a cut in CGT from 28% or a cut in top rate income tax from 50% or 45% which pay for themselves because they raise more revenue. There will be a substantial revenue loss from raising the tax threshold and some revenue loss by raising the 40p threshold.

The first offset to the tax cuts will be increased revenue elsewhere. People with more spending money after tax will pay more VAT, fuel duty and other consumption taxes.

The second offset will be more tax revenue of all kinds as economic growth is likely to get a stimulus from the extra private spending power the tax cuts generate. It is likely to add to confidence and activity levels.

The third offset is some decline in benefits. As more people get into work, so there will be fewer on unemployment related benefits. As more people are on higher net and gross pay, so there will be reduced payments of top up benefits to make up their incomes.  A natural decline in benefit spending because people are better off will be a welcome spending cut.

We will need to see the official figures for how much  each of these categories contributes. The rest will need to be done by reduced spending.

In this Parliament the deficit has been reduced whilst large tax reductions through raising the Income Tax threshold have been pushed through. A Conservative government wishes to do more of the same. I welcome any move to cut Income taxes in ways which get more people into work and reduce the need to pay people top up benefits. I want people to be better off and benefit spending to fall as a result, which is what I understand this policy to be all about.



  1. Mark W
    October 4, 2014

    During Cameron’s speech I had to pinch myself that this wasn’t Thatcher/Lawson and the era when what you have stated here wasn’t rocket science to anyone but those that wanted to drag us over the internal German border to their idea of paradise in the DDR.

    Forget the centre ground get on the common ground. Long overdue.

    1. Mondeo Man
      October 4, 2014

      Mark – When we see a cabinet reshuffle with Eurosceptics on the front bench then we might be able to believe it.

      Otherwise take it all with a pinch of salt.

    2. Hope
      October 4, 2014

      But ironically Labour had to spell out that while in opposition Tories stated they would stop child benefit to EU children who do not live here. This costs us £600K a week or £31 million a year. Cameron had apparently admitted there is nothing he can do about it. Another one of those EU renegotiations fantasies I suspect. Overseas aid and EU contributions could all help reduce our tax bill.

    3. outsider
      October 4, 2014

      Dear MarkW, The Lawson/Thatcher tax cuts were made at a time when the overall budget was in surplus, thanks in some measure to the Budget pain on the early 1980s. With apologies to Mr Redwood, income cuts before 2018 would not make any fiscal sense. The promised cuts make more sense politically, because they would compensate for the inevitable rise in mortgage interest rates at a time when average earnings are projected to be rising only in line with the costs of living (RPI).

  2. Lifelogic
    October 4, 2014

    Of course we can afford tax cuts just stopping the absurd & pointless HS2 might save £80 billion. When you cut one tax you increase activity and also increase the tax take in other taxes. If people & businesses keep more of their money they create demand, expand, employ more, have more confidence and grow.

    The point is we cannot afford not to cut the state sector and cut taxes when on earth will they finally start? There is vast scope for cut in the state sector. It is 50% over paid and pensioned, half of it does little of any use, much of it pays people to encourage then not to work and quite a lot of it does nothing but positive harm. The for example NHS is hugely inefficient rationed as it is at the point of often non delivery or delay tactics.

    The idiotic & counterproductive wars, over regulation, hugely expensive and intermittent green “renewable” energy absurdities and electric car subsidies (also misdirecting private sector investments) and the likes. The complexity of the tax system, health and safely, legal and employment systems, 95% of the EU activity, are another huge parasitic burden on the economy and the people.

    Cutting the largely incompetent and largely parasitic state sector is the only way we can go that will actually work. But we need to release and free up the private sector at the same time.

    1. Lifelogic
      October 4, 2014

      We should be aiming for far below the maximum tax raising point of about 40% of GDP (to be spent by the state) more like 20-25% of GDP would produce the best outcome for individuals and the economy in general. We have rarely been able to raise more than 40% of GDP in taxation even with Healey’s bonkers taxes at 98%.

  3. Antisthenes
    October 4, 2014

    It is possible to cut out many of the roles that government does to save 7 billion and more. Strip out most of those non essential services that local and national government do now and stop nannying people. And of course role back those domestic and EU laws which are many that add such economic and bureaucratic burdens to businesses and ordinary people.

    Gone will be many quangos, the EU and layers/departments of government and the savings will not be just 7 billions but many times more.

    1. libertarian
      October 5, 2014


      Absolutely spot on. Not a day goes passed when I don’t meet someone offering “free” taxpayers money for something or other. Not a day goes past that I’m not invited to some taxpayer funded jolly. Billions and billions can be saved by focusing on the core purpose of government. My County council in recent years started amongst other things. A gardening company, a coach company, a TV station, an employment agency, an airline yes an AIRLINE , all with taxpayers money and whilst failing their school and social service audits !!!!

  4. Margaret Brandreth-J
    October 4, 2014

    Today is a sad day for any hope of reasoned communication with IS.I send my heartfelt sympathy to Alan’s family and feel the same anger as many.Perhaps we need to find a way of making the IS pay monetarily for our debts as they certainly have no respect for life or humanity.

    1. Denis Cooper
      October 4, 2014

      IS must be extirpated, its irreconcilable core supporters exterminated and its misguided fellow travellers taught the error of their ways as may be appropriate in each case. As with those who got involved with the Nazis, due account may be taken of youth and naivety when settling on their treatment.

      1. Mondeo Man
        October 4, 2014

        Why can’t ransoms be paid to save our hostages ?

        “We don’t do deals with terrorists”

        Oh yes we do. (Northern Ireland)

        1. Lifelogic
          October 4, 2014

          Not paying ransoms is surely the right policy, bombing is however almost certainly not.

  5. Ian wragg
    October 4, 2014

    Smoke and mirrors John. Spending cuts will generate more VAT and more people in work will reduce benefits
    Most off the jobs will be low paid and subject to in work top ups. The welfare bill has risen proportionately with the increase in employment. Food which is most people’s priority doesn’t attract VAT.
    With the increase in NHS spending and overseas aid the deficit will rise
    what’s with the lies that we are paying down the debt
    . I see ukip are set to disrupt 100 or so Tory seats. Good.

    1. Mondeo Man
      October 4, 2014

      The freed up wages will also be spent on more foreign goods, widening our trade deficit. Rather than upgrading worn out gadgets let’s hope people use it to pay down their debts instead.

  6. Lifelogic
    October 4, 2014

    I have been reading the excellent (and even free) book “Sustainable Energy Without Hot Air” by the Cambridge Prof. David MacKay Chief Scientific Advisor of the Department of Energy and Climate Change. He understandably (perhaps/given his job) takes a slightly pro the government/BBC think/bicycle/train political line) but being a physicist he does outline the huge difficulties with nearly all the green solutions. At least there is one sensible person working for that Department.

    One problem with politics is everyone clearly prefers clean/green to dirty carbon and nuclear but fewer than perhaps 1/1000 actually understands the costs, practicalities and the numbers. Just how much land/areas would be need to cover with windmills or barrages, how hard expensive is it to store electricity etc. The numbers and huge difficulties are exposed and explained in excellent detail.

    My answer would be to use all the cheap fossil fuels not and use the vast sums of money thus saved to invest in R&D and crack better nuclear power solutions and do other things that we know work to help humanity now. Rolling out duff “green” technology now seem bonkers to me. Stop putting 80 billion in to HS2, stop green energy grants, electric car grants … and put the money into sensible nuclear power fast breeder, fusion and other R&D.

  7. Mike Stallard
    October 4, 2014

    I do not smoke any more. I drink very moderately (one a day if I like). I do not bet. I don’t buy a lot of stuff that needs VAT. But I do run a car into and out of town almost daily.

    A lot of my friends are what is known as hard working people who work in factories, on the land and with the disabled. I know several young Mums too. They smoke, they drink a bit (not much) and they run a car into work, often several miles away. They like to buy stuff too out of their wages.

    IF – and it ain’t going to happen – the Conservatives could reduce the heavy taxes on smoking, drinking, petrol and VAT – IF they could, and they won’t – they would create a tidal wave of support.

  8. Roger
    October 4, 2014

    John a very good article as ever. It begs the question however as to why more tax cutting couldn’t have been done in this parliament. Has the coalition prevented this?

  9. Brian Tomkinson
    October 4, 2014

    It’s not just your jam tomorrow tax cuts. Please explain how you are going to eliminate the budget deficit by 2018 when in 2010 your party told us that you would eliminate it by 2015. Remember that you highlighted to us that a government, led by your party, only ever intended to reduce the deficit by increased taxation whilst overall current spending was increased year on year.
    With regard to part of your election bribe, as Rory Meakin, Research fellow, the TaxPayers’ Alliance reports : “In 2009-10, the last full tax year before Mr Cameron became prime minister, the threshold was £43,875. Alistair Darling froze this in his March 2010 budget. George Osborne cut it to £42,475 in 2011-12, froze it again in 2012-13, then cut it once more in 2013-14, to £41,450. Pulling down the threshold like this dragged millions of taxpayers into the band: in 2009-10, it caught 3.2 million of us, but this year, estimates suggest that the figure will be closer to five million, or one in six taxpayers.”
    Listening to your leaders bemoaning the plight of taxpayers to which they have actively contributed such as this, and in so many other ways as well, for over four years is nauseating political humbug.

    1. outsider
      October 4, 2014

      Adjusted for RPI, the £43,875 threshold of 2009 would now be about £51,000, which puts a plan to raise it to £50,000 by 2018 in perspective.

    2. Lifelogic
      October 5, 2014

      Indeed and they got rid of personal allowances for those earning £100K and family allowances at £50K. Try buying a house and bringing up two or three children on that after tax, NI, and getting to and from work in London or the SE, you are probably better of on circa £26K of benefits and having more time to shop/cook more efficiently and do your own DIY.

  10. David Murfin
    October 4, 2014

    There is a fourth way – borrowing (which will be undertaken when the other three fail to meet the demand, and will be disguised as ‘events which prevent us reducing the deficit as fast as planned’.)

  11. Kenneth
    October 4, 2014

    I think it is time for the Conservatives to stand up for working people, long abandoned by the Labour Party. I think these proposals are the first steps towards this.

    I’d go further. Conservatives need to stand up for the vulnerable and needy. Excessive regulation makes the rich richer and the poor poorer. Excessive benefits imprison people into a lifetime of state dependency and poverty.

    It is time the Conservatives dismantled the cartels of lawyers, doctors, bankers, educationalists and big business which are protected by state over-regulation and freed us all so that we may all join in the mix of a free market.

    Only the Conservatives or UKIP could deliver this. I hope these two parties come to an arrangement so that people can breathe again and get out of the ‘socialist’ stranglehold.

  12. acorn
    October 4, 2014

    I don’t know, the guys at the OBR spend months working out the plan have just published it, and then, the supreme leader stands up at conference and … well, what can you say, nice try lads. This from “Crisis and consolidation in the public finances”. Chapter 6 then 5 if you are short on concentration. Otherwise, it may be the longest economic suicide note in history.

    ”… with relatively small contributions from tax increases and capital spending cuts […] the day-to-day running costs of public services, [are] primarily public sector pay and procurement. The cut in RDEL between 2007-08 and 2018-19 is forecast to be 5.2 per cent of GDP (£88 billion in today’s terms), a reduction of almost a third.

    (Of this cut in RDEL as a share of GDP, one third had been completed by 2013-14, with two thirds still to come.)

    Adjusting for whole economy inflation, real per capita spending on public services is forecast to be around 23 per cent lower in 2018-19 than in 2007-08, while real per capita GDP is forecast to be around 3½ per cent higher.

    The crisis and consolidation would leave the total levels of spending and receipts at roughly 38 per cent of GDP, much the same as they were when the budget was last close to balance in the early 2000s. But this would mask a large change in the composition of spending, in particular, with spending significantly higher as a proportion of GDP for welfare, debt interest and other annually managed expenditure and lower for capital spending and (much more so) day-to-day spending on public services.”

    PS. You will notice that there is no mention of our large Balance of Payments deficit. The inclusion of BoP and its affect on a “balanced budget” scenario, would render this document to be complete nonsense.

    1. outsider
      October 5, 2014

      Thanks Acorn. Having read this after your prompting, it is a sobering document.
      Given that half of planned departmental spending is protected, £25 billion a year out of defence, local authority services and the remainder would be pretty damaging, plus an extra net £5-6 billion to pay for the promised tax cuts, if he is to balance the books as projected. And Mr Cameron has just announced several new or increased spending programmes (starter housing, apprenticeships, National Civic Service).
      To avoid much greater carnage in the defence budget than previous cuts, Mr Osborne would have to change tack after the election and make some drastic reductions in welfare rates or eligibility – or raise more taxes on spending. Perhaps the new welfare system will help but I suspect not a lot.
      And, as you say, the trade gap is awful, growing and a prime candidate to spoil the party: it exposes the dire state of our low-productivity private sector.

      Reply Welfare is the largest budget and can be reduced as more people have jobs and more people have better paid jobs.

      1. outsider
        October 5, 2014

        Reply to Reply: Dear Mr Redwood, You are of course right but the £25 billion is judged to be the remaining structural deficit once the welfare budget has been reduced by the cyclical upturn in employment and pay. You are also right that the proposed £7 billion tax cuts will reduce welfare spending further but not, I think, by more than £2 billion. So Government spending programmes would have to be cut by, say, £30 billion to achieve balance in 2018-19.
        If we use the OBR projections (which may or may not be anywhere near the mark) then the output gap in 2018 would be zero on existing policies so a £5 billion net growth stimulus would not be prudent unless it is preceded by higher than expected business investment/productivity growth.
        The OBR projections also assume that the savings ratio will by 2118-19 fall more or less back to the pre-crisis level which you and many more of us thought unsustainable.
        We all know the cliche that the UK is the archetypal trading nation. But I was surprised to find on an IMF website that this no longer seems to be true. Among the G7, the UK has the third lowest ratio of international trade to GDP after the USA and Japan. We are only marginally behind France, Italy and Canada, but this measure makes no distinction between imports and exports. On experts, we are well behind these countries, as well as Germany.
        This illustrates the underlying weakness of our economy.

        1. outsider
          October 5, 2014

          Correction: we have more than our fair share of experts but not enough exports. ,

  13. Mark
    October 4, 2014

    The essence of your analysis is spot on. Yet we continue to see unintelligent comment from other politicians and the media that presumes that none of the effects you mention occur. Indeed, excluding feedback effects is also the basis on which the OBR seems to prepare most of its assessments, so I’m not sure how much clarity we will get from the Autumn Statement. It would be a great improvement in the general standard of debate if such factors were generally recognised.

    The other missing item is the effect of inflation. Unchanged tax thresholds would represent a substantial increase in the real tax burden through fiscal drag. Raising the 40% threshold to £50,000 in 2020 is no more than indexing it if we assume 3% inflation, while the £12,500 starting point for basic rate tax is only a tax cut of £95 p.a. (20% of £475) in today’s money on the same basis.

  14. R M Spriggs
    October 4, 2014

    Paragraph two and four – give with one hand and take with the other! What happened to smaller Government? No Mr Redwood , I am not convinced.

    1. lifelogic
      October 4, 2014

      Cameron is alas a bigger government man heart and soul. More EU, 299+ tax increases, daft laws on gender insurance, more regulation, poorly conceived bank slotting rules, it goes on and on and on.

  15. oldtimer
    October 4, 2014

    You make sound points about the effects of the proposed tax cuts. It is not a zero sum game. Yet we get the usual suspects bellyaching about it.

    By way of contrast we do not hear them bellyaching about the huge subsidies paid to operators of uneconomic wind farms and solar farms. I read that these are capped at £7.6 billion in 2020 – that I assume will be the annual cap. This subsidy is and will continue to be paid for by long suffering taxpayers for the privilege of paying c£150 per megawatt hour for their electricity compared with market prices based on gas at c£51-55 per megawatt hour! Then Mr Davey insulted the intelligence of those same taxpayers by stating yesterday that this was necessary to keep the lights on! He failed to mention that all these hair brained schemes do not actually keep the lights on; that is achieved (we hope) by the fossil fuelled generating capacity that is kept on inefficient standby for those many periods of time when the sun does not shine (most of the time) or the wind does not blow (much of the time) or blows to hard requiring forced short down of the turbines (some of the time). For this abject state of affairs we must thank the Labour party, with especial mention of Mr Ed Miliband who piloted the Climate Change Act through Parliament, and Messrs Cameron. Clegg, Huhne and Davey of the Coalition who have continued and reinforced this disastrous Act of Parliament.

    1. Lifelogic
      October 4, 2014

      Indeed complete lunacy, religion over logic, politics over physics. Who on earth would chose to fly on a plane designed by green religion dopes like Ed Davey, C Huhne types?

  16. Richard1
    October 4, 2014

    We should take note of the immediate boost to opinion poll ratings for the Conservatives after this announcement. Of course people pay far too much tax in the UK. All Labour and the LibDems can do is trot out the same tedious and supposedly popular policy of spending ever more money on the NHS paid for by ‘ a little bit more’ from the rich. Obviously there are huge areas of public expenditure which could be cut but which, unfortunately, seem to be ringfenced also by the Conservatives – HS2, green crap, overseas aid etc. No doubt all govt departments could also usefully do a bottom 10% exercise and get rid of the least productive 10% of their employees without any adverse effect on public services.

    There is plenty of scope to get the budget balanced and taxation / GDP down to c. 30% where it needs to be for the UK to be competitive high growth economy.

    1. Denis Cooper
      October 4, 2014

      You must mean the 2% boost to Labour, putting its support 5% above that for the Tories but so giving it an effective lead of about 12% taking into account the bias in the electoral system because the LibDems blocked the boundary changes:

      But that’s just one opinion poll.

      And please don’t put all the blame on UKIP …

      “Ukip is ‘serious threat’ to Ed Miliband’s chances of a Labour victory at the next general election, former aide warns”

      1. Mondeo Man
        October 4, 2014

        UKIP probably has a neutral effect over all.

        It can never be an serious party with such a broad base of support. It will be unable to reach a consensus.

        However, it covers issues which unify Labour and Conservative voters alike. Ones which are neglected by the political clique. Some of those supporters remaining with the main parties share the same concerns.

        There ought to be referenda on the issues which have such a huge effect on our country and which cause such unhappiness.

        1. Denis Cooper
          October 5, 2014

          UKIP will have little effect on the outcome of the election UNLESS its support continues to rise and rises well above 20% taken across the country as a whole. Looking at its upward trend over the past two years or so as shown here:

          and just extrapolating the curve by eye, that would be possible but does not seem particularly likely.

      2. Chris S
        October 4, 2014

        The biggest influence on the General Election result could well be the relative performances of Labour and the SNP in Scotland.

        However well Miliband does in England, if he loses half his 41 Scottish seats to the SNP he will find it very hard to win an overall majority.

        I haven’t seen any recent polling in Scotland that tests this theory and to my knowledge, it’s not been mentioned anywhere in the news media, but, it’s certainly something that Labour must be very worried about.

        We do live in interesting times !

        1. Chris
          October 4, 2014
          1. Chris S
            October 5, 2014

            Thanks, Chris

            This confirms what I suspected.

            Before the Referendum, who would have thought English Conservatives would end up supporting the SNP !

      3. Richard1
        October 4, 2014

        It would be nice to think of lots of Labour marginals falling to ukip, but I don’t think this will happen. The big threat at the next election is another tax borrow and spend Labour govt, which does nothing about the EU. Voting kip makes that more likely.

        1. Denis Cooper
          October 4, 2014

          Voting UKIP does not make a Labour government more likely unless that elector would otherwise have voted Tory. If he would not have voted at all then the effect would probably be neutral, but if he would otherwise have voted Labour then he would be making a Labour government less likely by voting UKIP. That’s the gist of the Independent article to which I’ve given the link, and of course there is a lot of substance to it.

          I even saw on TV that when Nigel Farage was in Heywood a Labour supporter was holding up a homemade placard saying:

          “Vote UKIP Get Cameron”

          so he has grasped that UKIP is now pulling votes away from Labour just as it has been pulling votes away from the Tories.

          1. Margaret
            October 4, 2014

            Of course Dennis the assumption is that UKIP is only taking from the right.

          2. Richard1
            October 5, 2014

            It is probably true there are some Labour voters going to UKIP. The Conservatives should do local deals where its possible to unseat a Labour or LibDem MP if there isn’t a good chance of a Conservative replacement. But its clear the overwhelming majority of UKIP voters are former Conservatives. Can you think of any UKIP politicians who might have been Labour or LibDems? Roger Helmer? Godfrey Bloom?

          3. Denis Cooper
            October 5, 2014

            You should both look at the Survation poll for Rochester and Strood:


            UKIP is in the lead with 40% with the Tories in second place with 31%. Add those together and you get 71%. Yet at the 2010 general election, when there was no UKIP candidate, the Tories only got 48%. It’s perfectly obvious just from that arithmetic that UKIP must have found additional sources of support, it cannot all be support pulled away from the Tory party. Meanwhile support for the LibDems has collapsed, with 14% of voters having become detached from them, and yet support for Labour has not gone up but instead has gone down by 3%. Add together 18% from the Tories and 17% from Labour, more than offsetting their initial gains from the LibDems, and you get 35% for UKIP, with a balance of 5% made up of defectors from the English Democrats and people who didn’t vote at all, and that could be UKIP’s 40%. I don’t claim any exactitude for this analysis, and I haven’t looked at the details in the Survation poll, but I believe that this must be a better broadbrush picture than one in which UKIP is just “stealing” votes from the Tories.

  17. Bert Young
    October 4, 2014

    Pre – election statements and , so – called “promises ” are all words in a vacuum . I can never recall any Chancellor giving away with one hand and not taking it back with another ; the utterances being made now by all the Parties are meaningless . The public are living in a world when every day heralds some new rise in costs of one sort or another – food and fuel top the list ; inflation has hit the pockets hard . By 2018 when all the reductions in tax and other promised benefits are in place the public will not be able to say ” I am better off”. Of course it is possible and necessary to make cuts in public expenditure but to rely on growth in the economy to pay for the cuts is to rely on a “fools paradise”; we know full well that – one way or another , the Chancellor will be pruning and modifying to keep his reputation intact . Labour will make the mistake of using the “Robin Hood” approach and drive us further into the red and a subsequent Government will once again use the claim that they have to put the economy to rights . My bet is that in 20 years time with all the changes in place and all the promises having run their course , we will be no better off and there will still be a struggle to reduce the deficit . This gloomy attitude is all due to being old enough to be pragmatic ; please prove me wrong .

  18. petermartin2001
    October 4, 2014

    The first offset to the tax cuts will be increased revenue elsewhere…..

    Yes that is exactly right. And on the second and third offsets too. It’s good to see a politician explaining how tax does come to be collected. A decrease in tax levels doesn’t necessarily increase the deficit. An increase doesn’t necessarily reduce it.

    A increase does however reduce the number of transactions to collect the same revenue which will depress the economy. A reduction will increase the number of transactions which will stimulate it. That could give rise to an increase in inflationary tendencies in the economy, so that would be the only danger.

    1. petermartin2001
      October 4, 2014

      PS The rest will need to be done by reduced spending.

      But just have a think about this!

      Reducing spending will also reduce the tax take. For example if a naval ship is not built, the ‘savings’ will mean that all the workers who would have had jobs building the ship won’t have them. They won’t be paying some 30% or so in income tax. The steel to build the ship won’t be made. The workers making the steel won’t have jobs either. They won’t be paying 30% or so in income tax. The steel maker won’t be paying corporation tax. Won’t be paying payroll tax or NI.

      The workers will instead be collecting welfare. They won’t have money to spend in the shops or pubs. VAT receipts will be less.

      Not building that ship will be almost as expensive as building it, in the final analysis.

      1. Stephen Berry
        October 4, 2014

        OK, I have had a think.

        If the naval ship does not get built, then I would hope not to pay my share of the tax which would have been needed to build it. Therefore I get to spend a little more elsewhere which could then go towards the creation of jobs elsewhere.

        If a naval ship does not get built, it does not mean that workers in the shipyards necessarily go on the dole in perpetuity. People can get other jobs, indeed I have changed job a fair number of times myself, so I know it can be done.

        What really increases output is not playing around with demand, but making things more cheaply. When we replaced a hundred men with scythes by one combined harvester, this raised our standard of living and was a good thing, even though the men with scythes may not have immediately agreed with this. Ditto when the power looms replaced the handloom weavers, even though I have no doubt that the latter may have paid less tax for a short period.

        In the above examples the rest of us would benefit by paying less for our bread and clothes. Have no fear, we would also manage to benefit if the naval ship did not get built.

        1. petermartin2001
          October 5, 2014

          “What really increases output is not playing around with demand, but making things more cheaply”

          Is this really true?

          If we consider everything, that is made in the UK, is for sale in a giant department store we can see that for everything to clear, then everyone who has earned any income by way of profits, wages, salaries, interest payments or capital gains from trading in the UK has to spend it.

          If they don’t, then more stuff will accumulate than is being sold. Companies will reduce their future production until they’ve reduced their inventory levels. Their profits will fall. Workers will be laid off.

          Lets say the demand is less than the supply by 5%. Then suppose we could somehow make the same things 10% more cheaply. So from the same resources we can produce 10% more.

          So, yes, sales increase by 10% and prices are 10% lower but the 5% shortfall in demand still remains if not everyone is spending what they earn.

          So, to make up for that, someone else is going to have to spend more than they earn. It’s just arithmetic. Now the standard advice handed out by the IMF is that economies need to be restructured in favour of exports. The problem of the demand deficit is then fixed by overseas customers. They have to spend more than they earn.

          It’s the much vaunted “export led recovery” which in practice is quite illusory. For every country like Germany, who runs an export surplus, there has to be a country like the UK which runs an import surplus. Again it’s just arithmetic.

          So who else can spend more than they earn? Well the UK customers can. One way to get them to do that is to stoke up a credit boom. Make loans easily obtainable and cheap. Of course that’s OK when the boom is happening but afterwards when the boom runs out of steam? We know what happens then.

          So that leaves Government. If imports are more than exports, and people aren’t spending enough, then Governments have to take up the slack. There is no other option.

          Reply Your understanding of economies is very limited. If I save someone else invests – i.e. they spend my money. I lend it to them by depositing it in a bank which lends it on or by investing it in a company’s shares or lending it as a bond to government or a large corporate. Money saved is not frozen. An economy needs savings and investment as well as income and spending. Banks, individuals, companies and government have balance sheets and income and expenditure budgets. They need to avoid these getting too stretched to avoid financial crises. They collectively need to spend and invest enough to keep the economy progressing.

          1. petermartin2001
            October 5, 2014

            “If I save someone else invests – i.e. they spend my money”

            Yes this is the neo-classical view of the way saving works. But it isn’t a Keynesian view. If a saver deposits a sum of money with a bank, it may do nothing with it all all except buy government gilts. Therefore it just adds on to the National Debt.

            Keynes has some sophisticated arguments on this point, but we can see from our own experience that bank lending, which is essentially what you mean, is no way related to the amount of money they have at their disposal from savers.

            In the years preceding the 2008 crash the banks were lending freely. Afterwards they weren’t. Is that because they were went from having a lot of money, to having much less money from savers?

            I would say not. They stopped lending because of the perceived risk.

  19. English Pensioner
    October 4, 2014

    If I understood the BBC News correctly, the Tories are talking about tax cuts “before the deficit has been reduced to zero”. Surely even once the deficit is zero, the country still has to pay off the billion of pounds of borrowings. Surely what is needed is not a zero deficit but a negative one so as to leave enough money to start to pay off our national debts.
    What strikes me quite forceably is that so many people in the media, and even in parliament, don’t seem to understand the difference between a deficit and a debt and seem to think that once we have no deficit, all will be well.
    I’d like to hear about the Tory plans for paying off our debt!

    1. petermartin2001
      October 5, 2014

      Every country needs its National Debt. Even Norway which has more oil money than it knows what to do with still maintains a National Debt of some $114 billion.
      or 743 billion Norwegian Korone.

      So why doesn’t Norway pay it off? It is because their National Debt is the store of financial assets of all those who wish to hold Norwegian Krone.

      All countries, have a mixture of assets and liabilities. The liability of the National Debt allows individuals and companies to hold assets.

      Reply You can have a successful economy with no national debt!

      1. petermartin2001
        October 5, 2014

        reply to reply

        I’m not sure which country you can be thinking about. All the successful economies I can think of have a substantial National Debt accord to the link in my previous comment.

        1. Stephen Berry
          October 6, 2014

          Reply to reply to reply.

          John did not actually have to be thinking of any country, but after a little trawling of the internet I find there seems to be five countries with no national debt, Macau, British Virgin Islands, Brunei, Lichtenstein and Palau. None of these places look like economic basket cases.

          I often feel that couching economic questions in terms of national economics only serves to confuse what should be simple. Can an individual live a successful life debt free? Yes, I think that goes without saying. Can you also live successfully with a certain amount of debt? Yes, you can and many people who take out and pay off a mortgage (I number myself here) can vouch to this. But can someone take out too much debt and find that this weighs them down? It seems they can or we would not have politicians and the Citizens Advice Bureau for ever chattering about the iniquities of payday loans.

          “Every country needs its National Debt”. Tell that to the Argentinians.

          1. petermartin2001
            October 6, 2014

            Reply to (x4 )

            I think you’ve looked up (in wiki ?) countries with no “external debt”. That’s not the same thing as public debt or national debt.

            External debt is money owed to other countries, or residents of other countries, which may or may not be offset by money being owed the other way.

            So, for instance, Japan which has double the National Debt (in terms of GDP ratio) as the UK has only a third the external debt.

            It would be possible for a country to have no National Debt, or rather no net liabilites, if it used someone else’s currency but not if it issued its own currency. Issuing currency and bonds creates those liabilities.

            So, its good to make things simple, but it has to be right too.

            The main point to remember, in an accounting sense, is that for every asset there is an equal and opposite liability. You and I can only have net financial assets if someone else (ie government) assumes the necessary fiancial liabilities.

  20. Bill
    October 4, 2014

    Agree. In ideal world the percentage of people employed by the State would be extremely small. Indeed reading A J P Taylor we note:

    “Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman. He could live where he liked and as he liked. He had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home…The Englishman paid taxes on a modest scale: nearly £200 million in 1913-14, or rather than less than 8 per cent of national income” (English History 1914-1945, p 25).

    The state has ballooned over the last 100 years. How much better it would be to shrink it down again! Let charity and private enterprise thrive. That, surely, is a genuinely Conservative message.

    1. Denis Cooper
      October 4, 2014

      I think it’s fair to say that while people may not have been constantly aware of the state in the form of national authorities many of them would have had frequent contact with its local manifestations – the church, the aristocracy and gentry who supplied many local magistrates, the parish and borough councils.

  21. Denis Cooper
    October 4, 2014

    On TV the Tory chairman Grant Shapps claimed that the coalition government had halved the budget deficit inherited from the Labour government, then made a small correction by saying it will have done that by next year.

    Well, in 2009 the Labour government was having to borrow a quarter of all the money it was spending, and to be sure of being able to do that, at least at reasonable interest rates, it had got the Bank of England to rig the gilts market with (finally) £198 billion of newly created money; while according to my rough estimate posted here:

    that is now down to the coalition government only having to borrow one seventh of the money that it is spending, so Shapps’ claim that it will have halved the deficit may well be about right for next year.

    But a government still having to borrow one pound in every seven or eight that it spends means that it is still a long way from being able to cut its accumulated debt rather than just cutting the rate at which it adds more to the debt pile each year, and it seems quite likely that we’ll be hit by the next recession before it has got to that point.

    1. petermartin2001
      October 5, 2014


      To understand what is happening with the deficit you need to look at the sectoral balances. Neil Wilson does an excellent job in collating these figures:

      The government’s deficit is now almost entirely accounted for due to the trade imbalance. Domestically , the government’s account is just about balanced.

      That’s not something we see discussed very often in the mainstream. No-one seems to be too concerned about the trade deficit any more, and even when concern is raised, it isn’t linked to the internal deficit.

  22. lojolondon
    October 4, 2014

    John, I would have put it another way – can we afford not to cut Government spending. The UKIP suggestion to cut foreign aid by 90% is well overdue and absolutely bang on. How can we possibly justify borrowing money to give it away? Time to tell foreign aid recipients the same thing we tell our very own school children, sick and pensioners – “there is no money”.

  23. agricola
    October 4, 2014

    Three suggestions to pay for tax cuts.
    Overseas Aid down from £12 Bn. to £2.0 Bn. = Saving £10 Bn.

    EU membership after leaving = Saving £12 Bn. per annum.

    Welfare Spending reduced by 25% = Saving £40.0 Bn. in the first year, and after the dependency culture is throw into reverse who knows what saving could be made in subsequent years.

    Not only would it pay for tax cuts, you could start reducing the National Debt, currently at around £ 1.3 Trillion and rising. The Deficit much clung to is only a flow meter. However I do not see anyone in the Conservative Party having the determination to do it in any of the above three obvious areas of profligate spending.

  24. bigneil
    October 4, 2014

    Apart from nobody trusting whatever reason comes for “affording” these cuts, it is yet again, “if elected”. Over four years of ignoring the electorate, throwing millions to your leaders beloved EU financial black hole, cuts to the main forces and an ever increasing population that the taxtake has to pay for, “if elected” seems to have took over from “I promise”. Who will be paying for all the newcomers houses to be built and maintained -the taxpayer. Who will be paying for their NHS – the taxpayer. Who will be supplying their free money – the taxpayer. So your leader will have the doors wide open, to people who create more financial problems – and your leader says we will pay less – yet again another unsustainable promise. Where is the sting? Are we heading for a “Logan’s Run” -where overpopulation results in people being deliberately killed off by the govt.
    And regards the HR farcical promises – why take all this time to do something about giving free lives to murderers rapists and paedophiles who come here to commit crime, knowing an asylum claim will get them a reward of all they need. – anyone cynical would think there was an election coming.

  25. Robert Taggart
    October 4, 2014

    You could always put up our benefits payments – £202.00 per week for ESA – and tax it !
    It would make us scroungers taxpayers – we could thereby do our bit for Blighty’s budget !!

  26. BobE
    October 4, 2014

    Are you all blind?? These are promised for 2020. There will be another election by then. There are no tax cuts imminently. Or did I miss something.

    Reply They are promised for the period of the next Parliament, just as there has been a big hike in the tax threshold – a tax cut – this Parliament.

  27. APL
    October 4, 2014

    JR: “I welcome both tax cuts announced by the Prime Minister for the next Parliament.”

    The operative words being … ” the next Parliament’.

    Since the Tories are deservedly unlikely to be re-elected that translates into never.

  28. Lindsay McDougall
    October 4, 2014

    The answer is “not yet”. These reductions cannot sensibly be made until the back of the next parliament. What mus be acknowledged is that delivering the necessary public expenditure cuts will be difficult, especially with several categories ring fenced. There is no justification for ring fencing foreign aid, for continuing old age ‘goodies’ such as free prescriptions and concession fares, or for the ‘triple lock’.

  29. ian
    October 4, 2014

    I do not believe in tax on wages, it a slave system, I will give you a tenner if you vote for me, right up a politician street while they got their nose in the troff. another scandal on expense coming up soon, trying to keep it out of the news. Left to the politicians and their friends house prices and rents will double in another 10 years and you will still be looking at 20 per cent rise in your wages in that time, They will still be complaining about housing budget is high and needs to be cut back. your position as a vote will not change. They love inflation because they own nearly all the assets and the high paying job with big pensions which they have given to their family tax free, can you afford not to spend your pension so it can be given away tax free. The money and the perks they handing out to the top ten per cent are unreal, massive and you do not realise it because they say it for you the voter, it just another way of getting around IHT for them, the pay packets of their friends have double and in some cases tripled when 50p tax rate came in. HS2 is for them to travel up and down the country so they do not have the inconvenience of having to get the jet out for a short trip.

    You see they will not let inflation die, it what they live for, they tell you with out inflation thing would really be bad for you but how would know when you have had inflation all your life. In 40 years of inflation, a house in London in 1975 cost 20.000 pounds today that house costs 750.000 rent was 30 pounds today 800 pounds a week, the rents need to be a lot higher to justify 750.000 pounds investment and they want house prices to go up another 50% by 2019 but you cannot put much on the rent so it will be 1,250 million pounds on 900 pounds rent just looking at that you can see that they are out of their minds but that what they want. The inflation figures are all wrong they do not include housing fuel most foods and so on. they always fiddle the books, like the budget coming before election will be well fiddle for you. The cuts will keep coming and family will end up in shared housing like the migrants 15 to 20 a house which is illegal but the council and the government turn a blind eye. By the way the tax cuts will disappear with inflation and you will end up worst off as usual.

    They have know answer but to keep their nose in the troff .

  30. Martin
    October 4, 2014

    You could save some cash by stopping the waste of money known as Department of Transport third runway reports that appear every few years.

    Just let the airports build the runways!

    October 4, 2014

    No. Nor can we afford the exotic notion of allowing local big-mouth and in the majority of cases any mouth politicians with questionable local support to allocate spending for their locality on the back of their giving jobs to their cronies,relations, and cross-region cronies and relations as if in so doing we are keeping the Realm in some kind of harmony albeit a corrupt diphthong.
    Cut the number of local “politicians” by 90%. Cut Westminster politicians by 75%. And rid the Body Politic of the practice of parachuting MPs into town and city Constituencies where a local thief is just as good as one of cosmopolitan origins. A Clasping Coneflower by any other name smells just as…

  32. ian
    October 4, 2014

    The government of the day and the BOE are most likely to wait for wages inflation before trying to put up interest rates up which will be to late as usual looking at the employment falling below 6% soon. The plan is to have interest rates at 3 per cent by 2018. If inflation take off next year like it has in housing then you will be in trouble with wages growth hardly going up and inflation running at 4 per cent the BOE will be force to put up interest rates 1 per cent at a time instead of 1/4 per cent a time. It a fine line going forward with the markets and the companies wanting to keep interest rates at 0.5 per cent for share buy back and the stock market going up. I know they should start now because the market will still go up with 1/4 point rate rise every 4 month. If they wait for big and small companies to put up wages first they will be to late. Rate rises is good for the stock market because sends out a signal that all is ok. They will mess it up as usual, even if they get this right how will they go forward with house prices up 50% from hear inflation running at about 2.75 per cent and wages just under 2% per year and from 2018 you still have to move as always with biggest amount of debt you have seen, companies and private debt will be massive and the government debt will still be going up at about 30 to 40 billion year, that if they can keep inflation down, but by 2019 if it last that long that your lot brother and sister. inflation and rates rises will be out of control again as always. You have been on borrow time now for the last 6 years with 0% rates and QE and no one in that time has fix the system because they always get bailout, we shall see happen next time, good luck.

  33. A different Simon
    October 4, 2014

    Until measures are taken to sort out housing shortages and disincentivise land speculation any extra cash will just go into further inflating the house price bubble .

  34. Terry
    October 4, 2014

    Wonderful, the Quad have, at last, decided to cut taxes to promote economic growth. So why did they not do this 3 years ago? Instead of counterfeiting our currency and allowing our Banks to borrow from the BoE at 0.5% and loan to the Government at 2%, making the bankers richer through the bonus culture and the Country more in debt. Why did they not just cut company and personal tax commitments by an equivalent value? UK consumers account for 70% of our GDP, so why not give them more of their own earnings to spend? Duh?

    Contradicting his originally correct anti-QE stance, prior to the election, Gideon obeyed the demands of Governor King and continued with the currency abuse. And that fateful decision is going to cost us much more in the future.

    Hong Kong boomed on a low tax regime while the the UK bombed on a high tax culture. Was that not good enough an example for us? I guess not, for those in charge.

  35. Gary
    October 4, 2014

    @Stephen Berry

    exactly. see Bastiat’s broken window parable. Everything the govt does is opportunity cost, with a dismal record of doing worse than the foregone opportunity.

  36. REPay
    October 4, 2014

    I was genuinely pleased by the PM’s conference speech. Thank you for this clear explanation – I wish more Tories could explain this to our skeptical media. I note that Labour always wants to know how we will pay for tax cuts, some of which are self-financing, while it rarely worries about spending and borrowing!

  37. ITF Tory
    October 4, 2014

    One of the effects of Gordon Brown’s disastrous reign in charge of our country’s finances was a shift in the balance of public spending towards benefits payments. I can’t speak for everyone, but I for one would much rather see the money spent on things such as education, defence, health, transport, etc, and not on handouts. I think benefits payments are needed, but certainly not on the scale we have today, which is a result of Gordon Brown’s attempt to create a client state. Why, therefore, are the Conservatives not slashing the welfare budget in order to protect spending elsewhere? Over £200bn on welfare spending, which dwarfs all else. Why not slash this by, say, £50bn? Who wouldn’t want to see this money spent elsewhere?

  38. ian
    October 4, 2014

    They do not want to save money because that takes GDP down and debt to GDP go up, that working against what they want GDP up, debt % to GDP down that they position and they cannot get out of it, so when they talk about cuts, they have to find other ways to put GDP up, the usual one is inflation or debase the currency or both.

  39. ian
    October 4, 2014

    GDP has gone up by 200 billion in last two years to 1800 billion today with house price inflation, food and fiddling the books, they call it inflating away the debt, I call it inflating away your life, your wages go up by 1.6 per cent if your lucky, they have ready said that public sector will not have another pay rise for four years but house will go up by another 40% by 2018 so very thing look good. They only care about what the books look like ie debt to GDP.

  40. ian
    October 4, 2014

    Nothing about Rotherham 1400 abused children for a 16 years period, only one arrest and must still be going on. No investigation elsewhere, they like you to think Rotherham was the only place it happened. The government sex scandal is no were in sight. They just talk about a two bob tax cut that you might get or might not and rubbish like that but not the real problems we are facing. Wars terror which people of this country could not care a hoot about but what going on in our country they do not care a hoot about.

  41. ian
    October 4, 2014

    The reason I do not vote is because it is unconstitutional for a government to be form in this country without 50 per cent of the electorate voting, that is my position, if they cannot form a government then they will have to change they attitude towards the voters of this country and bow to your demands, till that happen you will get nowhere with politician in this country. Not voting is better than protesting and doing silly things to get what you want because I can see big trouble coming and this is the way go about it in peacefully way, they cannot save us because they are the problem so we have to save ourselves.

    Reply There is no minimum number of votes for a legal government. Demo0cracies work much better if more people participate but they still work if very few participate.

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