Austerity and Utility - Take One

It was said of Clem Attlee’s second Chancellor of the Exchequer, Stafford Cripps, that he almost revelled in doling out the bad economic news. Well, Alistair Darling is now giving out the bad news, but how he’s liking it is not readily apparent. He’s certainly not liking having to explain it.

And austere it is. Government spending growing at the rates put forward in Wednesday’s Budget means more likelihood of job losses, with many public sector workers – not all of whom are at CEO level – facing what may be a pay freeze. It’s going to be more of the same in the private sector, too.

Should we be worried about this? In a word, yes. Because the ability of such people to spend money is going to be a crucial part of getting the economy to recover. In the aftermath of the Great Depression, folks either had no money, or held on to what they had, with the result that economic activity remained depressed throughout the thirties.

So how could more economic activity be generated from those millions of ordinary people, whether in the private or public sector, if they’re having to suffer pay constraints and therefore have little extra disposable income?

The answer has been supplied by the World’s Most Agreeable Politician (tm) Vince Cable and his fellow Lib Dems. And it involves a straightforward, but common sense, adjustment to the level at which income tax is levied.

The Lib Dems are proposing raising the tax threshold – that level at which we start to pay income tax – to take many low earners either out of tax altogether, or reduce their contribution significantly.

So why is this “common sense”? Well, if you’re going to give someone a tax break, giving that break to the folks for whom it will prove immediately useful is most likely to generate economic activity. The less well off will derive far more benefit – economists like to use the word “utility” – from an extra pound in the metaphorical pocket than the very well off.

This idea, however, is not universally popular on the right of the political spectrum. I’ll revisit the whole business, and show why the protests from the right are little more than hot air, later.