A ten-pence piece: (2) the policy

(See here for part 1 – the politics.)

Not all that bad, actually. It’s simple to implement and to understand. It gives a lot of people a bit of extra income just as the economy could do with some stimulation. It doesn’t throw any of this money at the rich. While it doesn’t make up for all the income lost by all the people affected by the 10p abolition, it does cover 80% of them fully and the rest on average have their losses halved. Among the gainers, indeed, will be the hard-up working families with children who were the target of the tax credit rises that the 10p abolition paid for.

(The Institute for Fiscal Studies judged that the measures in the 2007 Budget would overall take 200,000 children out of poverty, the autumn 2007 Pre-Budget Report another 100,000 and the 2008 Budget a further 250,000 {click through to the PPT presentations]. Politically, the Government has been all over the place and it’s made some serious policy blunders but underneath all that its anti-child poverty zeal is undimmed.)

But it costs money: this week’s changes will be £2.7 billion this year. As Peter Riddell puts it: “This means either higher taxes or lower spending since higher borrowing cannot be continued.”

Chris Dillow, though, disagrees, saying that this can, will and should come from higher borrowing:

Mr Darling is striking a blow against the tired cliché that chancellors must be fiscally prudent. …
This would take Mr Darling's planned borrowing this year to £45.7 billion. That means net debt could get very close to the 40 per cent of GDP limit that Mr Brown set back in 1997; the Treasury forecast in the Budget that it would be 39.8 per cent of GDP in 2010-11.
Isn't this reckless? Many commentators say it is. But there is only one man whose opinion really matters. And he doesn't care.
That man is Mr Market. Long-term real interest rates - longer-dated index-linked gilt yields - are less than 1 per cent. The market is therefore content to lend to the Government at rock-bottom rates. And if the market is offering Mr Darling the chance to get out of trouble cheaply, why shouldn't he take it?

I can’t say I’m quite so sanguine as Chris – better for public debt to be lower – but at the moment, given the choice between a couple of extra billion of higher taxes, spending cuts and raised borrowing, I guess I’d take the borrowing. £2.7bn is less than 0.2% of GDP.

But there’s something else on this point. Mentioned towards the end of an FT piece on the policy comes this:

The Treasury seems to be counting on the economy staying strong and on September’s scheduled large revision to the measurement of financial services in national income, which will raise the measured level of GDP by close to 1.7 per cent, making its [debt] rules easier to hit.

This was news to me. Quick, to the bat-web! According to the Office for National Statistics [PDF]:

European regulation instructed EU member states to introduce the allocation of ‘Financial Services Indirectly Measured’… into their GDP statistics… The effect of doing so raises the level of GDP. The UK… plans to introduce FISIM into the GDP series… [in] September 2008.

Another ONS paper suggests that making this change would increase GDP by about 1.7%. Not a statistical trick to make things look better than they are, but a genuine reassessment so that we can see the economy is bigger than we thought it was.

A 1.7% revision of GDP would mean that the 40%-of-GDP debt rule effectively becomes 40.7% of what we thought GDP was. Not a big change, but a little more breathing room. Handy, as the IFS reckons there’s a 50-50 chance of the 40% rule being breached, in which event the sky would fall in the Government would be criticised. For context, public debt was nearly 44% of GDP back in 1997.