"Which is why the chancellor will have to announce that taxes are going to rise at a specified date in the future"

Matt Yglesias was bothered by the following comment by Matt Miller:

"Matt Miller writes the deficit hawk’s case for running a giant short-term deficit but says it would be worth thinking short-term about what can be done in terms of the long-term deficit:

Bob Litan of the Brookings Institution suggests building such triggers into Obama’s blueprint from the start. Once unemployment gets back beneath 6%, for example, we could require a supermajority vote in Congress to run deficits higher than, say, 2% or 3% of GDP (by comparison, the trillion dollar figure will push us toward 7%, an all-time high).

Yes, promises like this can be broken. But given the extraordinary circumstances, writing this kind of future restraint into law would tell world markets that we know the debt spree has to end. Obama could also set up a bipartisan commission on Social Security and Medicare with a view to building consensus for action in a second term, by which time the current crisis will, with luck, be a fading memory.

This first idea seems problematic. If you have a weak economy and a huge deficit that succeeds in strengthening the economy, you don’t really want to pivot on a dime and implement a catastrophically sudden fiscal contraction. You’d probably have to change it to be more of a sliding-scale thingy."

I made the following comment:

1. Don the libertarian Democrat Says:
   November 20th, 2008 at 5:29 pm

   “Yes, promises like this can be broken. But given the extraordinary circumstances, writing this kind of future restraint into law would tell world markets that we know the debt spree has to end.’

   The point is to let investors know that we’re not going to print money to get out of this, or default. In other words, at some point, we’re going to either raise taxes and/or cut spending, to decrease our debt/deficit, which could get very expensive for us to service in the future, among other looming problems.

   Japan, for instance, in order to deal with this problem, is considering writing a tax increase into its stimulus. The problem with this is that some worry that instead of spending money, some people will save money against future tax increases and lower income. In this environment, that might not matter, and the Japanese might take saving more seriously than we do. But the concern is the same.

Here's a post on BBC by Peston that deals with the same problem in Britain:

"So part of the hole in the government's revenues to be unveiled after the weekend should be seen as permanent.

Which is why the chancellor will have to announce that taxes are going to rise at a specified date in the future, to fill the structural hole in the public finances.

To be clear, I am not talking about immediate tax rises.

Quite the reverse.

I am certain that on Monday the chancellor will also announce a significant package of measures to stimulate the economy.

These will include tax cuts and spending increases funded by extra borrowing, equivalent perhaps to as much as 2% of GDP.

And the bulk of the tax cuts will be directed at those on lowest incomes, partly because they have the highest propensity to spend - for the good of the economy - and also for reasons of social justice.

Alistair Darling will describe such a giveaway as vital to lessen the sharp and painful economic contraction we're experiencing.

But he will also announce deferred tax rises and deferred cuts in public spending - to kick in when the economy has recovered a bit.

When would that be? Maybe 2010, maybe 2011.
If he fails to announce such debt-reduction measures, there could be very strong downward pressure on sterling and a corresponding damaging rise in the cost for the government of borrowing.

And, to be clear, the incremental sums he'll announce he has to borrow over the next couple of years will be colossal - equivalent to at least 8% of GDP, possibly more, or well over £110bn per annum.

You have to go back to at least the 1970's for a time when public borrowing was spiralling up at such an alarming rate.

Such a rise in public borrowing would be unsustainable.

Which is why, to repeat, there will have to be deferred tax rises and deferred public spending reductions inked into the public accounts and announced by the chancellor.

All of that is inevitable.

So which taxes will rise?

Well my prediction is VAT.

For the sake of transparency I should say that I don't know that there will be a VAT rise.

But a deferred increase from 17.5% to 22.5% in the VAT rate would raise around £20bn.

And it's one of the few future tax rises which might actually stimulate a bit of increased economic activity ahead of its implementation, rather than encouraging us to save

To use the economic cliche of the moment, it would give us all quite a "nudge" to spend now, before the swingeing increase in VAT would kick in. "

So, because the government is going to spend money on a stimulus plan, cut taxes, borrow money, and thereby increase the deficit and debt, the government is announcing a tax increase in the future. This is to assure investors that they won't default or print money, making investor's investments either worthless or worth less.

But, notice the VAT. Peston is guessing a rise in the sales tax. This gives people a nudge to shop now, helping to bring the economy out of the downturn. On the other hand, an increase in income taxes could lead people to save against the future loss in income, thereby prolonging the downturn.

We don't have a VAT here, so what other taxes could we cut that would have a similar effect? Increasing sales taxes, by the way, as some local governments are doing, doesn't seem wise in a downturn.