Dear Mr Osborne,
The economic strategy put in place by you and the coalition government in which you serve last May was the right one for Britain. In these turbulent economic times, the one thing we can be sure of is that Britain’s economic position would be considerably more precarious now had the government not put in place a credible, balanced and achievable plan to reduce Britain’s budget deficit.
But economic conditions have changed substantially since last May. Inflation is eating into people’s spending power at a greater rate each month, and the crisis in the eurozone is suppressing the export market which must play a vital part in Britain’s recovery.
It finally appears that the latter of these problems is now being dealt with. The first, though, just keeps getting worse, as today’s rise in the CPI to 5.2% shows.
Inflation itself is clearly a problem outside your hands, and even the Bank of England’s policy options are limited because of the factors forcing inflation up.
But fiscal policy is absolutely in your hands.
A VAT cut, as suggested by the Labour party, would be both expensive and pointless, benefitting mainly those who have enough money to spend on luxury goods in the first place (clearly not the people being most affected by the squeeze on living standards).
But one policy change that would undoubtedly help would be the swift implementation of the coalition’s policy of raising the income tax threshold.
First, this would negate the effects of current inflation on the lowest paid, meaning they don’t have to cut back as a result of price rises.
And secondly, it would have a positive knock-on effect on economic growth, limiting the damage that inflation will do to GDP.
And what’s more, given that this is a policy already budgeted for over the course of this parliament, the cost of implementing the policy more quickly is relatively small and short-term, and so can be paid for with temporary tax increases on those who can afford them.
At a time like this, it is both desirable in itself and economically sensible to cut taxes for the low paid. I urge you to do so, and do so quickly.