The British government's fiscal stimulus plan has met a pretty muted reception from all sides. (The record rise in the FTSE was not an endorsement -- it was mostly triggered by the US plan to bail out Citigroup). The right, led by the Tories, argues that the plan won't work because taxpayers will see through it, while the left is divided between arguing that it isn't big enough and fretting about cuts in public spending when the time comes to pay for it all.
There's anough analysis of the detailed plans in the regular media and elsewhere on the blogosphere, so these are just a few random thoughts.
* Doing nothing was not really an option. The fiscal situation was going to be dire even if the government had not decided to act. The expected size of the new giveaways is "only" £20 billion, yet the fiscal deficit is expected to rise from an originally-projected £43 billion this year to £118 billion in 2010-2011. Most of that is down to the slowing economy. The Government's gamble is that targeted stimulus will turn the economy round sooner rather than later, allowing deficits to fall after 2010. If the economy doesn't start to improve, then frankly the extra £20 billion committed this week is the least of our problems.
* Despite all the concern about public debt, the UK's position is not going to be all that bad even after the huge surge in borrowing that has been announced this week. The Government projects debt/GDP rising from the low 40% range now to 57% by 2011 before starting to edge lower. Japan's is near 100%, as are Italy's and Belgium's. At the end of WW2, the UK ratio was 250%. Of course, the UK is more vulnerable because its savings rate is low -- the Japanese and Italians buy their own government debt, rather than wait for foreigners to step up. But, to reiterate the point made above, borrowing and debt were on course to soar anyway, regardless of what the Government announced this week.
* VAT may not have been the right tax to cut. A notional 2.5% price cut doesn't add up to much when companies are cutting prices by 20% or more to attract customers. It may not even do much for big ticket items -- car dealers are reportedly giving discounts of £2000 per vehicle, which makes the VAT saving of about £350 on the average car look paltry. (Strictly Unscientific Survey Department: I was in my local M&S on Monday. It was very busy. I asked a couple of folks at the checkout why they weren't waiting for the VAT cut to be implemented before buying. They responded that it was too small to make a difference). It would have been better to target the lower-paid through income tax cuts, especially as the things that the poor spend a large part of their incomes on (food, rent) are not subject to VAT.
* What would the Tories have done instead? They seem to be saying that monetary policy should be loosened further. However, we're already seeing that lower rates and even recapitalisation are not inducing the banks to increase lending (although, contrary to most of the bleating in the media, business lending has actually risen in the past year, according to the British Bankers Association). It's hard to see the Tories leaning hard on the banks to lend more, and unless that happens, monetary policy has no traction.
There's no guarantee that the Government's plans will work, and to be sure, all of the risks seem to be skewed to the downside. In a world where impossible things keep happening (two weeks ago, who would have foreseen a bailout of Citi?), the best we can hope for is that policymakers at least avoid doing things that history has shown don't work. This week's stimulus package just about meets that test.
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