Steinbrucksblitzkrieg

You never want to see news stories that include the words "German" and "surprise attack" in the first sentence, but this was posted on the Virgin media website on December 11:

In a surprise attack, German finance minister Peer Steinbruck derided the headline 2.5% cut in VAT announced by Chancellor Alistair Darling in the Pre-Budget Report while warning that a generation of taxpayers would be saddled with the debt.

In an interview with Newsweek magazine, he described the Government's switch to a "crass Keynesianiam" to try to spend its way out of the economic crisis after years of preaching fiscal rectitude as "breathtaking".

Needless to say Gordon Brown has dismissed the criticism out of hand, ascribing it to internal German politics and pointing out that Germany is introducing a stimulus plan too. I also think that Steinbruck has got it wrong, but not for the reason Gordon is implying. There's nothing wrong with Keynesianism at this time, something that most Governments have acknowledged as they've unveiled their own stimulus packages. Where Herr Steinbruck has got it wrong is in his suggestion that the UK has moved "crassly" into deficit after years of fiscal rectitude. I must have slept through those years; the cardinal error of Brown's economic policy, which may yet come back to haunt the UK, was his failure to rein in spending during the boom years, when the economy was in no need of stimulus. In fairness to Herr Steinbruck, he does talk about "preaching" rectitude, rather than practicing it; even so, it looks like a misrepresentation of UK economic policy.

Herr Steinbruck also derides the VAT cut as too small to have much stimulative effect, but he also warns that it could create a fiscal burden that will take "a generation" to pay off. I tend to agree on the first point, but not on the second. The UK budget deficit is set to soar from an initially-projected £43 billion this year to a forecast £118 billion in 2010, but the VAT cut only accounts for about £12 billion of that. The rest is down to the impact of the slowing economy on tax revenues and "locked-in" spending, and is largely unavoidable. The purpose of the VAT cuts and the Government's other stimulus measures is to make the slowdown as short as possible.

I've argued here before that doing nothing was not an option for the Government. If the public debt becomes burdensome in the future, it won't be because of the VAT cuts, but because of Gordon Brown's inappropriate fiscal policy between about 2000 and 2007.