"Darling fine-tunes recovery plan"

The government has gone completely and utterly mad:

The Chancellor, Alistair Darling, is spending the weekend putting the final touches to a package of tax cuts and big increases in public spending. The measures, designed to revive the flagging economy, are to be announced in Monday's pre-Budget report. It is understood Mr Darling will say tax cuts will only be short-lived and taxes will have to rise in the future.

*sigh*

1. The gummint has already extended current spending far, far beyond the core functions of the state (being those things which only the state can do and which 'add value'; law and order; refuse collection; street lighting; immigration control; defence etc), in other words it is wasting huge sums of money - at least £100 billion per annum. (I'm not counting pure redistribution i.e. welfare and pensions as gummint spending for these purposes). So there's no point wasting even more.

2. The State can also spend money on longer term 'capital' items, like transport infrastructure, which can add enormous value, far in excess of the cost, provided they stick to the budget (which they never do). But these projects take years to plan and implement, so initially there is an additional burden on the economy, which is exactly what we don't want right now. In fact, the State spends most of its time preventing private companies from investing their own money in infrastructure (see Heathrow, Kingsnorth, Donald Trump's golf course etc).

3. Then there's the marginal interest rate. Let's assume our National Debt is 40% of GDP, on which we have to pay an average interest rate of 5.4%. The higher the debt-to-GDP ratio, the higher the interest rate, of course. If they cheerfully borrow another 10% of GDP, the overall average interest rate might not go up much, let's say to 5.7%, but that's a marginal interest rate of 6.9%*

4. Then there's the hotly disputed idea of Ricardian Equivalence,"...an economic theory which suggests that it does not matter whether a government finances its spending with debt or a tax increase, the total level of demand in an economy will be the same. It was proposed, and then rejected, by the 19th century economist David Ricardo." He appears to have rejected it because ".. if people had rational expectations they would be indifferent between the two systems, but since they do not have them, they are subjected to a fiscal illusion which distorts their decisions."

IMHO, it is far simpler than that, and it is irrelevant whether people are entirely 'rational' (whatever that means) or not. It is a cash flow thing: it makes absolutely no difference whether we all pay an extra £1,000 tax this year; or whether the governments borrows £1,000 from each of us. Either way it's money out of our pockets. And whether we realise it or not, that money can only be repaid in future by taking more money out of taxpayers' pockets to transfer to the pockets of those people who lent the government the money in the first place.

The theory goes that the trick only works if people are dumb enough to overlook the fact that in cash terms, they'll never get the money back that they are lending the gummint now. But if household spending is to be maintained, this in turn has to be funded out of borrowing, because people have less cash of their own (having lent some to the gummint). Which is what got us into this mess in the first place.

OK, things get more complicated if the gummint borrows the extra money from abroad, but ultimately it must cancel itself out.

And what's worse, despite coming up with a plan that will worsen and prolong the recession, Labour are catching up in the polls.

*/sigh*

* You work out the marginal interest rate thusly:
40% of GDP @ 5.4% costs 2.16% of GDP;
50% of GDP @ 5.7% costs 2.85% of GDP
Therefore, that extra borrowing of 10% of GDP has cost us an extra 0.69% of GDP
Therefore the additional 10% of GDP that we borrow is at an interest rate of 6.9%.