Yesterday, on the Marr Show, Ed Balls stepped up his call for tax cuts. Previously, the shadow chancellor has called for a temporary reduction in the rate of VAT from 20% to 15% or 17.5%. A reduction in VAT is a gimmick which doesn’t increase purchasing power but, perhaps controversially, it does increase the profits of large chain retail stores.
The call for a rapid increase in the personal allowance to £10,000 is a good thing and will benefit the “squeezed middle” who, arguably, are the drivers of the economy due to their level of discretionary income i.e. they have discretionary income. The increase will provide taxpayers with an extra £650 a year. For those near the personal allowance threshold this will be a welcome relief from credit in order to pay for the cost of living. For the economic middle classes this will mean an increase in discretionary income thus increasing the aggregate demand and growth.
A temporary reduction in income tax by 3% would produce very similar results. I do wish, however, that the Shadow Chancellor would be more bold in his tax proposals and incorporate a reduction of business rates and further reduction in income tax to his jeering from the opposition benches.
Luckily, the Shadow Chancellor is not alone in his support for tax cuts as the two wings of the Lib Dems have united in calling for very similar proposals.