Keynes is not the solution

All of the talk about returning to Keynesian economics reminds me how I felt at University when I first learnt about his theory. I haven’t heard Keynes’ name for years which itself is perhaps an indication of just how serious the current economic situation is. His is the idea that the effects of recession can be reduced and the recession brought to a halt more quickly by the Government spending money on public works, even to the extent paying people to dig holes in the ground and fill them up again. Alastair Darling has been speaking about bringing forward capital projects and allowing spending to carry on unrestricted. The weaknesses of the theory include the time lag to get new projects under way; the fact that sucking in imported raw materials and labour for these projects can have an inflationary effect and ultimately that the extra expenditure has to be financed by either more borrowing or additional taxation. It’s my view that if the economy needs a boost it’s better to provide it through personal spending since individuals will make better decisions than the state by spending on what they need to maintain, or remain as close as possible, to their choice of lifestyle. This can be achieved through reducing personal taxes and such a change can be implemented quickly. With the decline in our manufacturing base the danger of imports being sucked in remains, although a significant proportion of household expenditure is on services, which are almost entirely provided locally. Nowhere is the need for reductions in tax more needed than for those on the lowest incomes who have seen the proportion of their income taken in tax increase massively over the past ten years. In many case low earners pay tax only to claim it back through tax credits. Change the system and not only will there be additional incentives to work, there will be a major simplification of a system that only qualified accountants and tax inspectors fully understand. Of course this won’t happen under Labour as the chief architect of tax credits was Gordon Brown and this Government are hell bent on a high tax, high spending strategy.