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brw daily ... no quick fix for flat economies.

  1. rembrandt

    5,802 posts.
    Hmmm... from BRW Daily...

    No quick fix for flat economies
    By Chris Richardson, a director of Access Economics

    The scenario sounds familiar: the economy struggles, the media demand that something be done, the leader fires a few fall guys and then announces that the solution is to tax less and spend more.

    Will President George W. Bush's tax cut help the United States much? I have my doubts.

    First, history says that government actions usually come too late, arriving after recovery is well advanced. That may be true this time, too. Although Bush says the tax cut could lift national spending by as much as 1% in 2003, the US Congress and the opposition Democrats may undermine that timing. US institutional processes are designed for safety, not speed.

    Second, although the move to stop double taxing of dividends is overdue, most benefits flow to higher-income earners, and because the rich spend proportionally less of a tax cut than the poor, much of the cut may be pocketed rather than spent.

    Third, a bigger budget boost to the economy actually came in 2002 (see chart), when there were also tax cuts as well a big lift in spending on security and defence.



    Fourth, the US federal budget is now firmly in deficit and, assuming the proposed tax cut is not trimmed too much by Congress, it looks set to stay in deficit. That is not sustainable - just ask the Argentinians or the Japanese. At some stage, taxes will need to rise again, or spending will have to be cut. If the punters fear that the deficit gap will be closed later by government action, then that is more reason to be cautious in spending the tax cuts.

    I am sceptical about quick-fix solutions to complex problems. Perhaps most importantly, I doubt that the US economy needs a boost from a tax cut. Admittedly, consumer spending is flagging, and businesses have little incentive to spend because most have excess capacity. However, Iraq's Saddam Hussein aside, I still see the US recovering strength through 2003 (with or without tax cuts) supported by record low interest rates and a more stable stockmarket. Tax cuts are not always the best option.

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    This is only my view ... read the red stuff.





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