February 7, 2008 | posted by Michael Baxter in UK economy |

It’s that time of the month again today. By the time you read this you will probably know whether rates have stayed on hold or been cut. There is even an outside chance the Bank of England will cut rates by more than a quarter of a per cent – although it seems unlikely.

The arguments for and against the change have been rehearsed here many times – but maybe they are really distracting us from the real issue.

Maybe instead we should be looking at a far more significant debate which is beginning to take on a new traction, and say that actually the key to seeing the US and UK through the credit crunch lies not in playing with interest rates – but rather with tax breaks for the poor.

And in eliciting support for this view we can call up one incredibly credible witness. ( I am incredulously intrigued - Ed)

Keynes, the greatest economist of the 20th century, said there are times when monetary policy just doesn’t work.

If consumers are already in debt, if asset prices are too high, then the last thing you need are measures to encourage more borrowing. Many argue that by doing this, you are merely sweeping today’s dusty problems under the bed, creating the risk they will return in the future.

Keynes would argue, though, that there are times when encouraging borrowing to get an economy moving, is about as effective as “pushing on a string.” It was one of the great man’s most-famous quotes, and it seems as relevant today as when he said it.

Keynes instead said the answer was to give a boost to the poor – tax breaks, and job creation.

Keynes himself was a man who seemed to propose policies that these days are considered to be socialist, but with his condescending way, and public school manner, never really endeared himself to the people he wrote so brilliantly in favour of supporting.

But right now, the debate is re-playing itself in the US.

As you know, George Dubya’s big idea – well it probably wasn’t his idea – was this massive $146bn tax break to US citizens. Under the plan, 117 million US individuals will receive a rebate of around $600, while married couples will be getting around $1,200.

It is a bold move. If the Brown government took a similar action, then our PM would be accused of blatant electioneering with the tax system. But, the measures taken are what Keynes would have recommended.

But, some people in the US felt the Bush plan didn’t go far enough, and yesterday a Democrat idea for handing out $157bn, but geared more to the poorer families (and in particular pensioners and disabled veterans) was discussed and finally narrowly rejected in the US House of Representatives.

Meanwhile, in the UK there is a growing debate on what the government should do. It is clear that government finances are strapped. A growing number of economists believe Gordon Brown will break his golden rule this cycle. If the Office for National Statistics decided to include government guarantees to Northern Rock in national debt, then the accounts will look even worse.

Yet it seems we are heading for a position when the economy needs tax cuts – especially tax cuts aimed at the poor – who traditionally have lower savings ratios – to get the economy moving.

Don’t be surprised if, ultimately, the golden rule is changed. This is increasingly looking like a meaningless measure – but cut through it all and the real problem facing the UK is that government borrowing was too high in the years of plenty. There is real danger we are about to pay the price for that.