Chancellor urged to copy Obama middle class stimulus in Budget

Published Tue 13 Mar 2012
US economist calls for cut in NI for the middle class & tax on ?2m mansions

George Osborne should look to Barack Obama and offer the middle class a temporary stimulus to boost consumer spending and cut household borrowing, according to new analysis from the US economist chairing a Commission for the think tank IPPR, published ahead of the Chancellor's forthcoming Budget.

US consumer spending increased by 2.2 per cent in 2011 while it shrank by 0.8 per cent in Britain. US households have reduced debts by 11 per cent since the bubble burst versus only 5 per cent for Britain.

The analysis argues that a UK middle class stimulus - equivalent to the Obama cut - would be a 2p cut in employees' National Insurance contributions (NICs) over the next two years. This would immediately inject £7 billion per year of household spending and debt reduction into the economy. Such a stimulus would yield a further £2-4 billion of growth through the 'multiplier effect', lifting GDP 0.2-0.3 per cent each year. Most of the benefit of such a cut would go to squeezed middle class families giving them cash to spend and pay down household debt.

A 2p employee NI cut would cost the Treasury around £5.5 billion per year (after allowing for extra taxes from increased growth). A 1 per cent levy on the value of houses over £2 million has been estimated to bring in £1.7 billion per year - not enough to cover the NI cut in a single year. But the NICs cut would be run for only two years and the mansion tax permanent. So, over six years the cost to the Treasury would be £11 billion for the two year cut, offset by £10 billion from the mansion tax. The mansion tax would cover most of the NICs cut while the remaining third would likely be covered by higher tax revenues from additional growth as the effects of the stimulus would last beyond the two years of the cut.

Writing in The Times today, Eric Beinhocker, Chairman of IPPR's Growth and Shared Prosperity Commission, says:

"An important reason why recovery has more traction in the US than in the UK is that President Obama has maintained his commitment to fiscal stimulus while the UK has focused on austerity. The biggest danger in the UK is not Greek style default but Japanese style stagnation. Even if the Government won't change its fiscal stance, there is something to learn from the US experience.

"We need a jolt to get the UK out of the low-growth, high unemployment trap we are currently in. A temporary tax cut for the middle classes, funded over the longer-term by a mansion tax would provide such a jolt."

Notes to Editors

IPPR's report - '10 ways to promote growth' - is available to download from http://bit.ly/IPPR8266

It argues for extra funds for the Green Deal to be used to take the scheme to scale by subsidising charges for installing energy efficiency measures and to subsidise the guaranteed employment of young unemployed people out of work for more than 12 consecutive months, matched by an obligation to take up the offer. It also argues for an increase in infrastructure spending of £10 billion in 2012/13 and the creation of a British Investment Bank operational by April 2013.

IPPR's report - Making the case for universal childcare - is available from: http://www.ippr.org/publications/55/8382/making-the-case-for-universal-childcare

It argues that providing universal childcare is crucial to improve the UK's female employment rate. It shows that that universal childcare pays for itself: each mother returning to work part-time on an average wage after a year's maternity leave would net the Treasury £4,860 over four years, in additional tax revenue. This rises to £20,050 if women work full-time.

IPPR's report - 'Deficit Reduction Averaging' - is available from http://bit.ly/dZLfRH

It argues for the deficit to be reduced at a slower and flexible pace that averages depending on the strength of the economy.

Contact

Richard Darlington, 07525 481 602, r.darlington@ippr.org

Tim Finch, 07595 920899, t.finch@ippr.org

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