Posts Tagged ‘fiscal policy’

There has been a great fear, generally fuelled by the media, that the monetary policy being pursued at present in recapitalising financial institutions is the only mechanism that the Government can call on to help to mitigate the effects of the current financial crisis.

There are certainly many more strategies open to the Government and if we had learnt anything by the 1980s from the strict prices and incomes policies of the 1960s, it is that national strategy must achieve the right balance between monetary and fiscal policy to allow Governments to regain control of the economy.

How successful the present Government will be when it attempts to do so remains to be seen and depends largely on the detail of the strategy it adopts. The present government has seconded the main weapons of monetary policy to the Bank of England Monetary Policy Committee and the present financial crisis is being seen as its first real test, the outcome of which will determine if that part of the Government strategy has been a success.

Although increasing national debt is no longer the political suicide note it once was, as long as it remains sustainable, the borrowing requirement for the UK in the short to medium term is considered by many to be too high and the real question is how does the Government ultimately pay for this?

The political uncertainty surrounding the financial direction for the country was clearly demonstrated this week when all three major political parties advocated tax cuts, while at the same time the Government also raised the possibilities of tax rises.

Taxes were due to rise next year anyway - the 10p tax fiasco bail out, the increased borrowing for the take over of the banks, the unpopular increases in the vehicle excise duty being three of the contributory factors.

So, where do the Prime Minister and the Chancellor go from here? According to the other UK party leaders, he cuts taxes but without increased productivity, this may lead to the vicious cycle of even more borrowing which will incur yet more debt.

There are no easy solutions to this - recessions do not simply disappear of their own accord - positive political action allied to sound fiscal and monetary strategy and discipline are needed to minimise the human impact.

Thomas Jefferson stated that “I believe that banking institutions are more dangerous to our liberties than standing armies” perhaps we are just beginning to realise the price of maintaining those liberties.