UK 'must cut spending or raise taxes,' say experts

Generali

Sir_Humphrey wrote: »

and b) not to understand it correctly.

What would be the correct understanding, please?

kennyboy66_2

Generali wrote: »

How much of that was rising GDP and how much falling debt? I suspect debt remained broadly flat except for a period around 2000-2004-ish. GDP has risen rapidly but now appears to be heading backwards.

A back-of-envelop calculation seems to show that MEW was perhaps 6% of GDP seems to suggest GDP has a way to fall yet leaving Mr Brown with rather less flattering debt numbers.

MEWing has certainly had an effect, but would be interested to know how you arrived at 6% from MEW, bearing in mind that GDP excludes imports. It seems astonishingly high.

I would think GDP has increased by 4 factors that will go into reverse.

GDP borrowing
Corporate borrowing
Private borrowing
Inward migration

But 6% from MEWing ? - I'm struggling to see it myself.

StevieJ

Sir_Humphrey wrote: »

If you actually read the story properly, those taxes will rise once the current stimulus is over. This would be sensible, as Keynesianism requires the reining in of the fiscal position in the good times.
http://www.ifs.org.uk/publications/4418

So the IFS favour the recent VAT cut.
http://www.ifs.org.uk/budgets/gb2009/09chap2.pdf
The IFS think New Labour are just like Thatcher and Major.
Seems you may have left yourself a hostage to fortune there!

:rotfl: Not that Thatcher women, now I know why I don't vote NL.

Generali

kennyboy66 wrote: »

MEWing has certainly had an effect, but would be interested to know how you arrived at 6% from MEW, bearing in mind that GDP excludes imports. It seems astonishingly high.

I would think GDP has increased by 4 factors that will go into reverse.

GDP borrowing
Corporate borrowing
Private borrowing
Inward migration

But 6% from MEWing ? - I'm struggling to see it myself.

MEW was about 9% of GDP.

Consumption is about 2/3rds of GDP.

Thus 6% of GDP is MEW.

Very simplistic but not that far from IB modelling IME.

kennyboy66_2

Generali wrote: »

What would be the correct understanding, please?

That the Laffer curve is a parabola with a theoretical optimum ?

That both right and left politicians only look at one side of the curve of their choosing ?

Sir_Humphrey

Generali wrote: »

What would be the correct understanding, please?

The correct understanding is that above a certain point, increased tax rates reduce revenue. Now, I doubt many people would disagree that at very high tax rates (say 95%) that might be true, but I find it difficult to believe that increasing the top rate of income tax from 40% to, say 50% would have that effect.

In the simple minds of the American Republican Party, this was interpreted as meaning that ANY tax cut would increase revenue. This is obviously absurd, at it would imply the highest tax revenue would be at 0% tax. So Reagan tried to cut taxes and ended up with a massive budget deficit. This fallacy is what is meant by the term 'voodoo economics' - trying to raise tax revenue by cutting taxes.

In technical terms, the question is where the apex of the Laffer Curve is, and whether it is far away enough from 100% to have any practical relevance.

Generali

KB66/Sir H

That makes sense. Raising income tax rates to 99% gives plenty of incentive to cheat/avoid. Raising them from 40-41% doesn't.

Each little increase will increase the number of people prepared to avoid and evade though.

My belief is that tax should be kept as low as possible - you earn it, you spend it.

kennyboy66_2

Generali wrote: »

MEW was about 9% of GDP.

Consumption is about 2/3rds of GDP.

Thus 6% of GDP is MEW.

Very simplistic but not that far from IB modelling IME.

9% over what period ?

I did some work on this but it was about 5 years ago.

At that time about 60% of MEW arose from people trading down, or exiting the housing market. I am sure that recent numbers were less, however it would still be significant. These people generally did not spend this money but saved.

Normal MEWers (lets call them the "sinners") where obviously much more likely (lets face it almost certain) to spend - but some of it would certainly have been to pay down unsecured debt.

Of those that spent it, my guess would be 60% house improvements, 40% other (which would include a large amount of foreign goodies and holidays).

6% seems way to high.

Generali

kennyboy66 wrote: »

9% over what period ?

I did some work on this but it was about 5 years ago.

At that time about 60% of MEW arose from people trading down, or exiting the housing market. I am sure that recent numbers were less, however it would still be significant. These people generally did not spend this money but saved.

Normal MEWers (lets call them the "sinners") where obviously much more likely (lets face it almost certain) to spend - but some of it would certainly have been to pay down unsecured debt.

Of those that spent it, my guess would be 60% house improvements, 40% other (which would include a large amount of foreign goodies and holidays).

6% seems way to high.

At about late 2006/early 2007.

It was a back of envelope calculation. Overall impact on GDP slightly higher unless protectionism is imposed. I stand by my guesstimate, it's as good as any other economist's guess (speaking as an Economist). Let's say fall in real GDP peak to trough should be say 8-12% by my rough calcs.

What do you think the impact of all this will be?

kennyboy66_2

Generali wrote: »

At about late 2006/early 2007.

It was a back of envelope calculation. Overall impact on GDP slightly higher unless protectionism is imposed. I stand by my guesstimate, it's as good as any other economist's guess (speaking as an Economist). Let's say fall in real GDP peak to trough should be say 8-12% by my rough calcs.

What do you think the impact of all this will be?

GDP Peak to trough of between 5 - 7%, which will be bad enough, similar to 1980-82 which is my benchmark for bad recessions.
Slow recovery / stagnation after that for a further 18 months, plus fair few reasons to think that trend growth from say 2011-2021 will be less than it has in the last decade.

I'm an optimist.