Will the fiscal stimulus help much?
Even with on Monday’s 1 per cent of national income fiscal stimulus, which reduces tax by £15bn a year for a little longer than a year, the Treasury still expects a recession, so Gordon Brown and Alistair Darling are not expecting their moves to prevent things getting nasty, only to limit the damage. The £20bn used by the chancellor comes because the stimulus lasts for more than one year.
The Treasury expects the stimulus to limit the downturn by half a percentage point, an assumption that economists generally think is reasonable. Three factors limit the effect of the stimulus. First, some of the benefit from lower prices will be saved rather than spent. Second, foreigners benefit from taxpayers largesse when imported goods are purchased. Third, the Treasury was intending to tighten fiscal policy anyway by a few billions of pounds in 2009-10, so any new measures for next year first have to overcome that hurdle before the government can claim to be boosting economic growth with lower taxes and higher public spending.
Immediately, the Treasury expects the reduction in VAT to cost £3.8bn in 2008-09 and this effect will be augmented in 2009-10 with a further £8.6bn as the reduced rate of VAT extends until the end of next year. Also in 2009-10, the Treasury is bringing forward £2.5bn of public spending from later to create a total package of £15bn added to the economy – which had not already been announced.