Magazine article The Spectator

Gordon's £500 Million Benefit Spree Would Be Better Spent on Tax Cuts Than Handouts

Magazine article The Spectator

Gordon's £500 Million Benefit Spree Would Be Better Spent on Tax Cuts Than Handouts

Article excerpt

There are several ways one might look at Gordon Brown's leaked plan to send £150 to each of the seven-plus million families receiving child benefit. The first, and kindest, is as an attempt to ease the coming winter's budget strain on what Sir Brian Bender, permanent secretary at the Department of Business, Enterprise and Regulatory Reform, during a first-class train ride from Leeds to London, too loudly dubbed 'ordinary people' -- not the needy, the more numerous 'ordinary'.

The second is as a straight-out election bribe, part of the 'fight-back' that the Prime Minister is planning for the autumn. Why he imagines that this will offset the unpopularity his policies and dithering have brought down upon his head escapes most observers. The voters have come to understand that what Brown giveth, Brown taketh away -- he can only give them a portion of the taxes he has taken from them either directly or by stealth. The most likely result is that the voters will do a Woody Allen: take the money and run, in this case to the polling booths to vote for the Tories at the first opportunity.

The third possible interpretation is that the Prime Minister knows that the game is up, that he will soon be Leader of the Opposition, or worse, and that it would be fun and shrewd politics to leave the public finances in such a mess that the Tories would never be able to sort things out. After all, £1 billion here (the fuel allowance), several billion there (to compensate 22 million people for the loss of the 10p band), and soon you're talking about real money, to paraphrase a politician in my country. Brown might be hoping to drown an emerging Tory government in a sea of red ink, forcing George Osborne to raise taxes.

The PM is planning to fund the new handout by requiring power suppliers to ante up for some of the emission permits they are now scheduled to receive free of charge. But since these utilities cannot print money, they will have to pass on the extra costs to -- the very people who will be receiving cheques from the government. Another stealth tax, concealed in utility bills.

Now, it does make sense to charge polluters for the permits to pollute, rather than distribute them without charge. But the intended use of the proceeds is, at the very least, problematic or, to regress to economists' jargon, sub-optimal. Strip the handouts of their purported relation to rising fuel bills, and they are merely money -- what we in America call a fiscal stimulus. Dust off your dog-eared copy of Keynes if you need refreshing about the use of a demand stimulus to combat recessions. If the real goal is to pep up a sagging economy, the money would better go to those more likely to spend it -- say, the 5.5 million families receiving child tax credit. That would buy the votes of two million fewer families, but do more to stimulate the economy. Such means-testing would more fully satisfy Brown's goal of redistributing income from the middle class to lower earners -- something the middle class will surely notice and resent.

Unfortunately, the payments would not provide much of a stimulus, as the costs passed on by the utilities to cover the price of permits would probably drain as much from consumers' pockets as the cheques from the government add to their incomes. But give the Prime Minister the benefit of the doubt, and assume that the payments are indeed in essence a Keynesian fiscal stimulus of the sort that has been at least modestly successful in the US. …

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