Lower Taxes?

During the last few months, the UK Government has been in denial about whether the economy has gone into recession.

As a result, the much needed solutions to dealing with the growing economic crisis have been slow in materialising.

The unprecedented one and half percent cut in interest rates on Thursday took everyone by surprise and, in itself, was an admittance that the Bank of England has misread the economic situation in this country during the last year and that it could have acted earlier.

The question is whether the prevarication by the UK Government and the Bank in admitting that there was a problem and, more importantly, putting in solution in place to deal with it, is too late to avoid a deep recession.

Certainly, the experts paint a bleak picture. Last week, the International Monetary Fund (IMF) predicted a sharp recession for developed economies with the UK being the worst affected of all by the credit crunch-induced downturn.

Other statistics are also worrying for any future recovery. British house prices fell by a record 15 per cent in the year to October with £30,000 wiped off the value of an average UK home. The pound has also fallen sharply to a record low against the euro.

In the business sector, the Insolvency Service said there were over 4,000 voluntary and compulsory liquidations in England and Wales in the third quarter of 2008, which is a 10.5% rise on the previous quarter and an increase of 26.3% on the same period twelve months.

Sales of new cars have also dropped by 23 per cent in a year, according to the Society of Motor Manufacturers and Traders (SMMT), which is placing the motor industry under enormous pressure. Indeed, the crisis facing US car makers may force Chrysler and General Motors to merge, which would cost an estimated 5,000 jobs in the UK alone.

Other sectors are also feeling the pain. U.K. factory production fell for a seventh month in September, the worst run for thirty years and Corus, the UK’s largest steelmaker, announced that it was cutting production by almost a third until at least the end of March with plants in Wales being the hardest hit

So what else can be done?

There is a growing consensus that the interest rates cuts alone will not be enough and that the government will have to consider other measures such as tax cuts. Some have called for across the board reduction in income tax which would put cash in the pockets of households across the UK and stave off a crash in the retail sector.

Others, such as the Centre for Economics and Business Research, have argued for a major reduction in the VAT rate from 17.5 per cent to 12.5 per cent for a period of two years. This would certainly help the poorer households as a bigger proportion of the income of the lower paid goes on VAT. It would also provide a real financial boost to many small firms which are being hit hard in the current crisis.

With the pre-budget report due in the next few weeks, both of the main political parties will be looking to announce tax reduction policies which can stimulate the consumer and business confidence and get money back in the pockets of taxpayers.

Of course, any such cuts will have to be paid for through cuts in government expenditure or, less palatably, by tax rises after the next general election. You can imagine which approach the Conservative opposition wishes to take and the approach which the Chancellor and the Prime Minister favour.

However, it is clear that we can no longer be timid about the current crisis and if such measures such as tax cuts for both individuals and companies are not implemented soon, it is likely that the UK economy will remain in recession well into 2010.

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