What NOT To Do on the Economy, Courtesy of the UK

As I paged through The Wall Street Journal this morning, I came across a headline declaring, “U.K. to Cut Taxes, Speed Spending in Stimulus Plan.”

Well, I thought, maybe the Brits got it half right. Unfortunately, even half right was not the case.

The Journal reported:

The British government will boost spending and slash taxes in a £20 billion ($29.73 billion) stimulus package announced Monday, an effort to cushion the impact of what is shaping up to be a deep recession.

In a speech to present his budget plans for the coming year, Treasury chief Alistair Darling laid out measures including a yearlong cut in value-added tax to 15% from 17.5%, an extension of tax breaks for low-wage workers, the acceleration of £3 billion in spending on infrastructure projects, and debt guarantees for small businesses.

To help pay for the stimulus, he said, the government will raise the top income-tax rate to 45% from 40% after the next election, which must be called by the summer of 2010. The increase will be the first for the British income tax since 1974.

Let’s take these one at a time.

First, a temporary cut in the VAT – a very ugly and dangerous tax – is better than nothing. But that’s about all that can be said. Temporary tax cuts do little since, by definition, a tax increase must follow.

Second, more government infrastructure spending is not the way economies grow. Infrastructure follows economic growth; it does not lead economic growth. If government infrastructure spending were the answer, then government should just keep pouring concrete wherever possible. In reality, government projects raise questions about waste and overruns, politics allocating resources rather than markets, and lost opportunities as resources are sucked away from the private sector.

Third, government bailouts of bad debt and bad decisions hurt the economy and taxpayers no matter who made the bad decisions – from small business to the largest firms.

Fourth, and this is the worst idea put forth, the British government has put an income tax hike in the mix, raising the top tax rate – which will hit many entrepreneurs and investors – from 40% to 45%.

So, while the British government wants to revitalize its economy, they are attempting to do so by offering temporary tax cuts that do nothing to boost incentives for productive economic activity, more wasteful government spending and bailouts, and higher taxes on those who have the resources to invest in and build businesses. It should be obvious that this will not work.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council