Surprise Tax Cut Could Be on the Cards: Niall Ferguson

Congress and the White House may throw a curveball and roll out a tax cut ahead of the midterm elections rather than boost stimulus spending to aid the struggling economy, Harvard University History and Business Professor Niall Ferguson told CNBC Friday.

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On Monday, Princeton Economist Paul Krugman told CNBC the US economy needs another government stimulus program to stop the economy returning to recession.

"Everything is pointing to the need for more spending," Krugman said. "The economy remains depressed."

But Ferguson was not so sure stimulus spending is on the cards.

"There is a political dimension here ahead of the November midterms," he said. "The Democrats need to come up with something before the elections and they could surprise people with tax cuts, not extra stimulus spending."

"Whether it has a significant impact is open to question," Ferguson said. "The US people are worried about debt so anything that increases the deficit could be counter-productive."

"In Japan in the 1990s fiscal policy did not work and in the US and Europe recent stimulus spending did not deliver," said Ferguson, who some have nicknamed the International Man of History.

“Medium-term fiscal credibility is the issue, not short-term," he said. "Paul Volcker should get together with the Republican Paul Ryan and work out a credible plan. Unfortunately there is no appetite for radical reform."

European Horror Show

Ferguson said the situation in Europe is very unstable.

"Look at Ireland where Anglo-Irish remains a huge issue," he said. "Germany is strong but the periphery is a horror show."

"Germany avoided Keynsian policies and is doing well," he added. "The big question is what Germany does with its unexpected wealth from its booming exports. If they spend then it is good news for Europe, if they, and China, keep on spending then our old friends global imbalances get worse."

"We could be back to the beggar-thy-neighbour policies of the 1930s."

"The crucial thing for Europe is to avoid a Lehman-type crisis," Ferguson said. "There is not much that can be done with the banking system. It will just take time to heal."