Wednesday, 16 June 2010

Simple solution for deficits

A heated debate rages in most countries: where should governments cut spending? where and how shall taxes be increased or introduced? Most commentators reject the lawnmower method as too crude. This would mean that all spending and/or taxes are adjusted by the same amount, without any exception. As everybody benefits from certain spending measures every expenditure has a natural constituency that fights tooth and nail to preserve that spending. People in favor of the lawnmower are therefore thin on the ground. In addition, no one wants to be branded 'cruel or inconsiderate' or (in academia) a simpleton. Much better to dream up elaborate - and complicated - schemes that hurt no one but miraculously slay the deficit dragon.

But is the lawnmower method really so crude? Cutting spending by 5 per cent and increasing taxes by 5 per cent cannot really be called brutal. After all, a few years ago everyone got perfectly by on an income that was, on average, about 10 per cent lower than it is today.

Introducing new taxes such as VAT or carbon taxes create just more red tape and are a dead weight on enterprise and future employment. They do nothing to reduce spending - and that is what got most countries into the deficit mess in the first place.