Tax Reductions For The Ressession

When it comes to economics Gordon Brown can talk the talk, even if he wanders off track sometimes when walking the walk. Odd then that, in the middle of his otherwise competent monthly press conference this morning, complete with five-point plan, the prime minister gave a porkie hostage to fortune. Does it matter to you? Dead right it does. Here's why.

Asked by ITN if he would "be honest" with the voters and admit he would have trimmed Britain's debt-to-GDP ratio if he'd seen the recession coming, Brown ducked it. Instead he replied that he'd inherited a 44% ratio (ie the amount of borrowed money as a share of our £1.5tn economy) and that it is 37% "on the latest published figures".

That's a bit disingenuous, a little economical with the truth, as watching Treasury officials must have muttered. True, Chancellor Brown did trim his Ken Clarke inheritance, for instance by using the £23bn he got on the 3G phone spectrum auction to pay off debt, not build hospitals.

But it's edged back up from the low 30s. Even before the forced nationalisation of Northern Rock, the bank rescue and "economic downturn" (as ministers persist in calling it), the Treasury was gearing up to acknowledge it is edging close to Brown's own 40% limit. Brown is right to say it's lower than America's, Japan's and Italy's (both over 100% by the way), but by the time all this is over, who knows? Do I hear 50%?

On other current estimates, including that of the Office of National Statistics, it's already 43.4%, and Alistair Darling is having to grapple with a structural hole in the budget – not enough tax revenue as distinct from a recessionary tax hole – which will have to be addressed sooner or later as well.

The PM ducked that question too when it arrived in various forms at today's No 10 presser. It's far too soon to say whether taxes will have to rise to pay for the costs of recession when the recession is over in a year or four's time (ie after the next election), he told the lads. "The right thing is to take action now."

And that means what the techies call a fiscal stimulus, ie a tax cut. The great thing about a recession which threatens deflation, ie falling prices, is that it requires a government to do popular things in the short term – like cutting taxes, not putting them up, all to get a stalled economy moving again.

In the past 24 hours all three main UK parties have entered a tax-cutting bidding war. David Cameron was on the airwaves at breakfast explaining his plan to give companies a £2,500 national insurance contribution break every time they employ someone who has been on the dole for three months.

In the Commons last night Vince Cable set out the Lib Dem plan, which includes all sorts of sensible ideas – the big parties pinch our plans, Vince noted – and a tax cut for the low paid – worth 4p off income tax – who will be quick to spend the money because they can't afford to save.

It would be paid for by higher taxes elsewhere, notably on the better off, also by attacks on tax avoidance and other money-raising devices on companies. In other words it would be "fully funded", ie paid for.

Tory spokesman Phil Hammond (deputising for lost-at-sea George Osborne) protested that this was no time to be raising anyone's taxes and said the Tories would fund their own form of "fiscal stimulus" by cutting spending on management consultants and government PR. So that's funded too and we're both in the same position, countered Cable.

Yeah, right, as ministers reply. Brown himself said Cameron's figures don't add up and that he contradicts himself every day in search of headlines – truer of him than of Dr Vince, of course. He made a better point when saying that a fiscal stimulus is not a fiscal stimulus if it's offset by a fiscal tightening – tax rises or spending cuts – elsewhere.

The fact is that all parties in all countries from here to China and back have been caught off-guard by the scale and severity of the financial crisis and its implications for the "real" economy, ie you, me and Chinese factory workers whose exports will suffer.

They're running to catch up. Brown again talked up the G20 summit in Washington at the weekend, where he hopes early steps to reform the IMF and other bodies will be combined with coordinated efforts to stimulate all economies. Brown is hopeful that President-elect Obama gets all this, though what'shisname will still be in charge this weekend.

Brown repeatedly praised China's $500bn fiscal stimulus as the way to go, though he refrained from saying that Germany – the other major state with serious surpluses and low domestic demand – has been timid.

As a matter of fact, so has Brown, most of whose stimuli so far – like the £2.7bn 10p tax U-turn – have been driven by politics, not economics.

The fact is that Britain may, as Brown claims, be better placed to escape recession by virtue of flexible labour markets and high employment levels, or worse, as his critics say, because of high levels of personal and government debt.

But if Darling signals tax cuts (benefit increases have the same effect) in this month's pre-budget report, as he is expected to, they'll have to be paid for eventually.

Lots of useful things can be done by governments to ease hardship – Brown was right today to chivvy the mortgage lenders and banks to look after their once-cherished customers – but we can't simply spend our way out of trouble. That's what we've been doing; it led to the crash.

And leftwing fiscal conservatives who include the Guardian's redoubtable economics editor, Larry Elliott, argue that the lesson of Japan's property bubble recession in the 90s is that spending only makes it harder to sell government bonds (to cover the borrowing), thus pushing up interest rates.

Pushing up interest rates may thus slow down recovery because it affects everything from business borrowing to credit card rates and mortgages. Monetary policy is the key to recovery, goes the counter-argument, pretty useless though the banks have proved so far.

So the eternal left-right battle, Keynes, Marx, Friedman and all those other dead economists we are in thrall to, fight on in proxy. There's a balance to be struck, as Brown didn't say, but seemed to imply at his press conference.

He seems happier talking about this sort of stuff. I thought his body language again showed signs of that "Brown bounce" we read about in another opinion poll today. Treat that warily too. Way to go.

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