The Impact of Spending Cuts and Tax Rises on Families

It has been well documented that the British coalition government will be making many spending cuts and tax rises over the next months and years. Many of these will affect families, either directly or indirectly.

haircuts

JOB CUTS

Cuts

There will be a number of job cuts in the public sector, but there will also be a knock on affect meaning some private sector jobs will be at risk. For examples, if public road maintenance is cut then it will affect those who supply this industry. Job cuts have a very obvious negative effect on people; it means they have less money coming in, something that could have a major impact on many families. The planned public sector pay freeze will impact people's earnings as well, as pay will be reduced in real terms. This will not have as much affect as those losing their jobs, but will still be a problem for some.

VAT RISE

From January 2011 VAT will be increasing from its current level of 17.5% to 20%. This will affect most things people buy. This will mean families generally have less money. Most food and children's clothes are exempt from VAT so the prices of these will be unchanged, but children's items such as toys, prams and cots will rise in price.

INCOME TAX

Income tax will affect people in different ways depending on how much they earn. High income families will take a hit with the rate at which people begin to pay 40% tax on their earnings set to rise. Low income families could benefit though with the rate at which people start to pay tax rising by £1,000 to £7,475. This will bring some people out of paying tax altogether.

CHILD BENEFIT & CHILD TAX CREDITS

There will be a child benefit freeze for the next three years, meaning as with some public sector pay, this will be reduced in real terms. Although this will be fairly minor it may impact the least well off families.

Child tax credits are due to be reduced for families earning a total of over £40,000, which may alter the lifestyle some are able to live. There will be an increase in child tax credits though for low income families with it increasing by £150 per year for each child.

HOUSING BENEFIT

In future housing benefit will be limited to a maximum of £400 per week. Large families living in expensive areas could be affected, for example a family who require a five bedroom house and live in an affluent area of London.

PUBLIC PROJECTS

Many public projects will have their budgets reduced or will be scrapped altogether. Depending on the projects this will impact all sorts of different people. Some that have already come under threat are playgrounds and other community project that benefit children, so families could be affected in this way.

The cost of bringing up children is ever rising and according to a survey by the Liverpool Friendly Society is now on average £193,772 for one child from birth to the age of 21. This means that even minor cuts and tax increases could have an impact on many families.

Andrew Marshall (c)

The Impact of Spending Cuts and Tax Rises on Families

Family Law in Partnership is a team of specialist Family Law solicitors.

Cuts

Tax Cuts Or More Government Spending to Stimulate the Economy?

There is really no fixed way to stimulate the economy. The degree of economic stimulation and the size of response during a recession largely depend on the cause of the recession. For any recession, the GDP make-up is the paramount determinant of the most effective stimulating mechanism.

ab cuts

When an economy runs into a recession, it is hard to believe that without any new action, the economy is somehow going to pull itself out. The inability of the economy to pull itself out with inaction indicates that the old ways of running business have to be significantly modified.

Cuts

Although it is important to free up money so that consumers can purchase goods when a recession strikes, it is more important to channel this money towards the most efficient goods which increase productivity in the long run. Governments have the power both to free up and to channel the flow of money although bureaucratic constraints hinder the speed and the effectiveness of the response. During recessions, struggling private enterprises producing inefficient products are usually more interested in disposing unproductive goods in the market and staying in business. This renders government action all the more relevant.

The government's ability to initiate any kind of economic stimulus greatly declines with a decreasing ratio of government budget to GDP. Having a fixed government budget to GDP ratio enlarges the government if the GDP grows with time. This in turn renders the government so cumbersome that its efficiency wanes with time. This diminishing effectiveness could be mitigated by modeling government institutions like the non-profit private industry while using the rest of the government apparatus to play only a regulatory role. While this helps to boost efficiency, it also strengthens the government's ability to steer the country towards economic progress with less hindrance.

An economy in recession could either be stimulated through increase in government spending or tax cuts. A rise in government spending creates more government sponsored projects, jobs and increases the cash flow for working families. This money is then channeled to other businesses leading to an increase in jobs in the private sector. Increased spending would entail an increase in taxes thereafter in order to minimize the budget deficit.

On the other hand, tax reduction raises the amount of cash available for businesses and consumers. Consumers can buy more goods resulting in an increase in jobs in the private industry and the private industry could in turn embark on producing more goods.

Government spending implies the government directs where the money needs to be spent. In tax reduction, the private industry allocates where the extra cash goes. While the government often focuses on long term opportunities, the private industry's focus is usually not stretched out beyond 5 years considering that the average life span of a US company is 50 years and its infant mortality rate is 10 years.

A reduction in taxes for small businesses and consumers really does little to keep the economy booming in the long run. This reduction would result in a temporal increase in small businesses. Having more small businesses in a recession does not generate more investment, but encourages more consumption. Consumption is bad for economic recovery. US consumption alone is 70 % of the GDP. Stimulating consumption may postpone a depression in the short run but the recession will become more severe when consumption is exhausted with no investment. Consumption stimulation provides a parachute for a slower free fall with little hope to rise.

A tax cut on small businesses is only effective in stretching out and exhausting an already initiated growth. Tax cuts on small businesses do not initiate growth. More often, an economic crisis requires stabilization with an orientation towards the initiation of growth than the expansion of growth. The increase in small businesses during a recession only results in the production of similarly existing goods with little or no changes in efficiency. This ends up being an illusory economic growth.

In addition, tax cuts create many disunited multidirectional economic fights by many different businesses. The ineffectiveness of multidirectional fights could not be overemphasized because economic resources get scattered everywhere thereby diminishing their strength to meaningfully reshape any economic meltdown.

A better strategy for tax cuts would be not to have an across the board tax cuts, but a reduction in taxes for industries that are expected to become the new production frontiers for the next decade. That would be money well spent. An alternation of more targeted spending and focused tax cuts is a sure means to keep the economy very efficient.

It is easier to see the ineffectiveness of tax cuts through the provision of lower taxes to businesses that are failing. A failing business requires a lot of restructuring and tax cuts give it an incentive not to restructure. With the tax cut, prices will be brought down and the consumption of the same poor goods is encouraged. When the well of tax cuts is exhausted, more tax cuts would be required to keep the industry afloat. This only leads to a deflationary spiral.

As personal finances dwindle, other programs such as food stamps, tax rebates and unemployment benefits help ensure that many existing jobs are not lost which will worsen the downward spiral. Such programs therefore only act as stabilizing mechanisms.

The effectiveness of the government to transform policies into actions is the single most significant factor in restoring economic prosperity. Should the government become very inefficient, then there is no doubt that tax reduction would play a more effective role in stimulating an economy during a recession. The government is needed more in a severe recession to make swift, smart and steady corrective measures. Government investment lays a formidable groundwork for future growth.

Every fiscal policy has a threshold below which its effect is insignificant. An invaluable fiscal policy would be simultaneous increase in spending and tax cuts, but no country has the luxury of excess cash to effect such a concurrency beyond both thresholds. This leaves government spending as the more efficacious policy. The challenge is to know these thresholds in order to institute the right measures. With the government budget constituting a fixed and appropriate percentage of the GDP, the government is sure to have the machinery to launch congruous tax cuts for the short run economic stimulation and increased government spending for long run stimulation without the burden of excessive deficits.

Tax Cuts Or More Government Spending to Stimulate the Economy?

THE OBJECTIF

[http://www.theobjectif.com]

Cuts