In the UK, David Cameron set of an alternative to the consensus view of increased public investment and spending, in response to deepening downturn in the economy.
- economically inept?
Let’s look at his proposals:
• Remove tax on savings up to the basic rate of 20%.
• Increase tax free allowances on savings for the retired.
Cameron the Enlightened
The problem that Cameron is trying to solve is that of the low returns to savers. It is generally recognized that giving people their own money back is a more effective way of growing the economy than large scale public investment so his proposal is encouraging in this respect.
Also Cameron’s proposal is cheap at this time because interests rate are so low. If you are getting a 2% return on your money, then the tax saving under Cameron’s plan is 0.4%. With the average saver having £10,000, that amounts to £40 a year or about £0.80 per week for the saver.
Cameron the Inept
This compares to the 2% reduction in Valued Added Tax ( a natonal sales tax). If the average person spends £75 a week on vatable items that this reduction will result in a £1.50 per week saving. So Brown’s proposal is on average about twice as effective as Cameron’s.
However, look at who is affected by the changes: the VAT savings proportionally help lower income families more while savings tax changes would benefit middle income more.
Cameron heavily criticised the VAT reductions but his proposals are even more ineffective.
Cameron the Partisan
The increase in tax allowances is really a give away to his supporters. It is targeted at the retired, middle income who are indeed suffering a fall in income as the returns.
The tax system already allows £7000 in tax free ISAs and through Post Office accounts, so the most substantial beneficiaries of his the proposed tax allowance increase would have savings of over £10,000.
However, now consider the scenario where interest rates resume normal levels of 6% as they must do in the next couple of years. The cost of the tax giveaway will be six fold what it is now and with the benefits going into the pockets of his supporters.
Savers will reap the just rewards of their savings but only once when we come out of recession.
Cameron does need to come up with alternative policies to the Labour Government but he needs to demonstrate he has some understanding of the economy and what is good for the country as a whole.
For example, he should agree with the current level of public investment but come up with a different set of priorities on that spending and propose putting in place a set of measures and controls to ensure the public is getting the best possible value for money for these initiatives. This would be a credible approach.