Page last updated at 16:59 GMT, Tuesday, 11 November 2008

Tax cuts: just one piece of the jigsaw

By Hugh Pym
BBC economics editor

Fiscal stimulus is all the rage in political debate these days.

Who knows, maybe it's the hot topic of conversation in the saloon bars and other watering holes around the UK.

David Cameron

Sounds a bit technical? In everyday language it means using Government money to pump prime the economy at a time when the revs are running low and there's a danger of stalling.

Tax cuts or public spending increases are the weapons of fiscal policy which can be used in the battle against recession.

Conservatives unveiled their plan for tax cuts to help businesses on Tuesday.

The Conservatives would offer a tax break of £2,500 to an employer for every worker hired, as long as that worker had been unemployed three months or more.

Businesses would qualify as long as they had not announced redundancies for three months before or after the hiring of new staff.

The aim would be to create around 350,000 new jobs over a year.

Different priorities

The policy would not involve extra Government spending according to the Conservatives.

The savings on unemployment benefits would cover the cost of the tax break.

Labour: Raised personal tax allowance to benefit basic rate taxpayers by £120 this year after 10p tax row, stamp duty threshold raised, 2p fuel duty rise postponed. Any further cuts expected to come in pre-Budget report

Conservatives: Abolish stamp duty for first time buyers on homes up to £250,000, raise inheritance tax threshold to £1m, cut corporation tax from 28p to 25p, encourage council tax freeze. NI cuts for firms who take on unemployed people

Lib Dems: Have already pledged tax cuts for low and middle-income families by cutting basic rate from 20p to 16p. They say people on £30k a year would get an extra £1,000 in their pockets. Would remove tax loopholes for the rich.

They have used assumptions based on experience of the same sort of policy in Canada where for every three new jobs created it could be shown that one at least was the result of the tax break incentive.

Employers organisations have given a cautious welcome to the policy.

But they point that creating jobs in a recession is not high on companies' priorities.

Safeguarding existing staff posts is the challenge for most businesses.

So it doesn't look as if it is anything like an answer to the major challenges facing the economy, with a recession looming in the UK.

The Tories response to that is that they already have other policies to help small businesses, for example cutting corporation tax, which could help them in a downturn.

So Tuesday's announcement is only one piece of the great policy-making jigsaw.

And confusingly the Tory policy is not technically "fiscal stimulus" as it does not involve new Government money being injected into the economy.

The Conservatives are opposed to the idea of pump priming initiatives which are not clearly funded by savings elsewhere.

Divisive policy

Which brings us on to the Government.

Gordon Brown has dropped a strong hint that the pre-Budget report, which could come as soon as next week, will be laced with a strong dose of full blooded fiscal stimulus.

At his monthly media conference, he called for a co-ordinated international strategy involving fiscal policy.

Conveniently the conference of the G20 industrialised nations takes place this weekend and the Prime Minister will hope for a communiqué at the end of the event which confirms an agreement along those lines.

Back from the G20 the prime minister and chancellor will unveil their package of measures, probably a mixture of tax cuts and public spending increases.

They will be funded with even more borrowing, on top of the already escalating public sector deficit.

And a political divide is likely to open up - the Conservatives, and possibly the Liberal Democrats too, attacking the idea of higher borrowing as a way out of recession.

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