In Britain, Mervyn King, the Bank of England governor and Gordon Brown, the chancellor, aim to slow down the consumer boom, but the results of such a policy can be far too dangerous.
According to many economists, Mr Brown’s ‘Golden Rule’ will most probably be broken as everything shows that he will finally exceed this years borrowing target of 27 billion pounds by approximately 10 billion.
Chancellor’s Brown self-imposed ‘Golden Rule’ states that the Government must only borrow in order to invest and not to finance current spending. The idea behind this is that the current generation’s expenditure should not be financed at the expense of the following generations.
Higher taxes and rising interest rates seem to be round the corner leaving thousands of households by some hundreds of pounds worse off over the next years. It can be supported that British consumers might have had it too good for too long, but the situation now can be proven really painful for many households, especially for those that have recently raised large mortgages relative to their income.
The British have over-invested in property and if new taxes are to be imposed on housing this will probably cost the government many votes. If however, Mr. Brown decides to act in a prudent way to fill in the 10 billion pounds gap, even at the cost of loosing re-election, the most likely revenue source, according to many economists, is National Insurance Contributions and Value Added Tax. NIC rose by 1% in April, whereas VAT has been stable since 1999.
According to Christine Frayne, senior research economist at the Institute for Fiscal Studies, increasing NIC and stamp duty could be among Mr. Brown’s favorite options. She says: ‘if the Chancellor wants to stick to his so-called golden fiscal rule he’s going to have to increase taxes. He may choose to cut spending instead, but that’s unlikely given the pledge to have world-class public services. He could look at National Insurance as it has been done before and there’s scope to increase it further. VAT is a possibility but that’s quite a big change and also tends to be quite unpopular’
Amongst the dangers is that sudden changes in property taxes could be destabilising and we might experience the same outcome, just as when Nigel Lawson tried to reform the mortgage tax relief in 1988, causing the biggest property dash Britain had even seen, with house prices souring by 35% a year.
As far as the ‘Golden Rule’ is concerned, we won’t be able to find out whether it was kept or not before the end of the economic cycle, since the rule is defined over the economic cycle and only looks back when the cycle is completed.