Reasons to doubt Brown's proposal - 2

Who is to have the extra money in their pocket?

Is it to be firms ( as in the Tory proposal- N.I. holiday) or is it to be families? (Of course if families have it, and if they spend it, it will become the income of firms.)

If firms receive the tax boost, it could delay further sackings and retrenchment. It could prevent the firm going out of business if the recipient is a small company. It could help cash flow and tide them over for a few weeks. It could also mean that the firm resists creditor demands for a little longer. It could reduce its borrowing at the bank, or the need for fresh borrowing.

Result: Firms may retain labour that would otherwise be laid off, or there may be little difference in this if firms decide to use the money to ensure the longer term future of the firm, by settling with creditors, repaying loans, and so on. In the former case there could be a slight employment benefit elsewhere. In neither case would government revenue, a.g. VAT, be helped.

Alternatively, the money may be put in the hands of households. Brown has hinted that this will be the case, presumably helping the lowest paid most. What will they do with the money? The answer is not clear.

They may decide to reduce their indebtedness, to avoid future risk or to try to keep their house.
This will have little effect on the economy, other than increasing the availability of credit to be extended elsewhere, although at the moment lenders seem reluctant.

Alternatively, and especially with pensioners, they may decide to restore difficult cuts they have made - especially in the area of heating and food. Spending more on heating will not do much to generate economic activity, and at this time of year extra spending on food will do little. In fact with companies generally holding high stock levels, retailers in readiness for Christmas, any extra sales could produce no extra production even if it produces or saves some incomes.

Britain is a trading nation. One difficulty wherever money is put into pockets a significant proportion of spending goes on foreign goods and services, which will generate employment and incomes abroad. This is why Brown is desperately trying to get all nations to adopt similar policies, or else his "fiscal stimulus" (gamble) will merely aid recovery abroad.

It has to be said that there is a large risk that much of the spending will go abroad, on imported goods, including food, fuel, overseas visits and holidays. Brown seems to have calculated that Santa Brown will be remembered at election time for his monetary present just before Christmas, and that at Christmas we are likely to spend the extra money on presents and conviviality.

He may have just got something right!