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Tax Cuts May Help to Reduce Britain's Budget Gap

Monday, 1 Mar 2010 | 9:37 AM ET

So in the end Britain did climb out of recession in the fourth quarter, with the figure revised up to 0.3 percent from the initial 0.1 percent estimate. This was better than most forecasts but the Treasury was right to be cautious post announcement.

For a start, the quarter-on-quarter numbers looked better because of a downward revision to the third quarter figures which actually drove down the annual rate of growth.

Most of the rest was driven by a slowdown in the rate of inventory unwinding, which many have pointed out is hardly the basis of a strong recovery.

As for political interests, the government will probably be happiest. It can claim to have taken the country out of recession and yet still say the recovery is fragile and would be put at risk by a prospective Conservative government cutting spending too early.

This had got the Conservatives pushing a more muddled message but just last week the shadow Chancellor George Osborne used a keynote speech to try to answer claims that the Tories had gone soft on making significant cuts from day one.

Grow the Economy to Get More Tax

The thing is, I regard these discussions on timing of cuts as immaterial. If a new Government is elected in May, the actual amount it could cut by the end of the year would make little to no difference to the size of the deficit.

And even when it comes to meaningful spending cuts there might not be too much difference. Frontline service will be protected and everything else would be up for grabs.

But the real point is you don't cut huge deficits through spending restrictions and raising taxes. The only way to take this economy out of crisis is to grow it so that tax receipts go up. And the way to stimulate growth... targeted tax cuts.

In his speech, Osborne did talk about increasing business investment and making Britain more competitive with tax but there was little detail. He could do worse than adopting ideas floated by the Centre for Policy Studies.

Reduce the main rate of corporation tax to 20 percent. The UK would once again be a world leader on setting a low rate of corporation tax.

Scrap the 50p tax rate or the phase-out of the personal allowance for high earners.

Increase capital gains tax rates to 20 percent and 40 percent; and introduce a ten-year taper rule so that no capital gains tax is payable on longer-term gains.

The estimate for implementing these reforms is under 5 billion pounds ($7.4 billion), but for the country they could be priceless.

So don't be shy, George, shift the political debate, go for growth and a message of hope. Who knows, you might even see an improvement in polls.