By Mark Deen
Nov. 10 (Bloomberg) -- Prime Minister Gordon Brown called on governments around the world to coordinate tax and spending policies to shore up a slowing world economy, his strongest signal yet that he will cut tax in the U.K.
``What I am determined to do is to get all countries around the world trying to get their economies moving again, and one way you can do that is by putting more money into the economy by tax cuts or by public spending rises,'' Brown said on GMTV in London today.
Brown's comments set out the U.K.'s position before a meeting of world leaders in Washington on Nov. 15. A coordinated program to trim taxes and boost spending would give Brown political cover to allow Britain's budget deficit to swell when the Treasury announces its plans in coming weeks.
Britain's economy shrank in the third quarter, prompting a political consensus in favor of tax cuts. The Conservative opposition, which last month chided Brown's plan to borrow and spend more as the economy slumps, today said it will accept tax reductions that are funded by cuts in future spending.
``Spending our way out of recession will not work,'' George Osborne, the Conservative lawmaker in charge of tax policy, wrote in the Financial Times. ``Targeted tax cuts would help, but they must be properly funded. Any tax cuts must not permanently increase the structural deficit and must be combined with a strategy to reduce it over time.''
Worst Hit
Next year, Britain's economy may shrink 1.3 percent, the most in the Group of Seven nations, according to the International Monetary Fund. The Washington-based lender expects a contraction of 0.7 percent in the U.S., 0.5 percent in the nations sharing the euro and 0.2 percent in Japan.
There are already signs that other countries are ready to heed Brown's call. China, the world's fourth-largest economy, announced a 4 trillion yuan ($586 billion) stimulus plan yesterday, saying the funds will be used by the end of 2010 as part of a ``proactive fiscal policy.''
A similar message came yesterday from Sao Paulo, where finance ministers from the Group of 20 nations met over the weekend to lay the groundwork for the heads-of-state summit in Washington. Ministers agreed to act ``urgently'' to bolster growth as the world's leading industrialized economies battle recession, according to the G-20 statement.
Efforts Overseas
Japanese lawmakers approved a 1.8 trillion-yen supplementary budget as part of a stimulus package on Oct. 16, and Prime Minister Taro Aso on Oct. 30 promised to pump an additional 5 trillion yen into the economy. German Chancellor Angela Merkel on Nov. 5 announced a 50 billion-euro ($65 billion) stimulus package to spur economic growth.
In the U.S., Democrat lawmakers are considering passing two stimulus measures, one during a so-called lame duck session this month and another after President-elect Barack Obama and the larger Democratic majority in Congress take office in January.
``Further fiscal stimulus designed to bridge the gap until monetary policy becomes fully effective can be expected'' around the world, said Holger Schmieding, chief European economist at Bank of America Corp. in London.
In Britain, Brown and Chancellor of the Exchequer Alistair Darling will set out tax and spending plans this month or next. Brown has said he's ready to increase borrowing to ward off recession and that he will bring forward some spending.
Brown's View
``We must use the power of multilateralism to establish a global consensus on a new, decisive and systemic approach to strengthening the global economy,'' Brown will tell bankers in London today, according to a text released by his office. After committing more than $3 trillion to bail out the banking system, policy makers must now turn to ``international co-ordination of fiscal and monetary policy,'' he will say.
Spending is already increasing even though the inflow of tax receipts slows. Since March, Brown's government delivered tax cuts and spending increases worth 4.8 billion pounds ($7.6 billion) to give relief to low-income earners, delay an increase in fuel duties and to help homeowners with mortgages and stamp- duty taxes on property purchases.
Britain had its biggest budget deficit since 1946 in the six months through September. Economists say the shortfall may reach 7 percent of gross domestic product over the next two years, more than double the 3 percent limit set down by the European Union.
Support for Cuts
While central banks from Washington to London have reduced interest rates at unprecedented speed, easier fiscal policy may work more quickly in cushioning the world economy amid the current crisis.
Monetary policy, already near its loosest in history, acts with a lag and is less effective when financial systems are frozen, economists say. Central bankers including Bank of Italy Governor Mario Draghi and Federal Reserve Chairman Ben S. Bernanke are among those recommending action from governments.
``A package of emergency tax cuts'' would be the most effective way of ``increasing demand in the economy,'' Frank Field, a lawmaker with the ruling Labour Party, wrote in the Sunday Telegraph newspaper yesterday. ``Steering these cuts towards the poorest'' would ensure that most of the cash would be spent immediately, he said.
Field is a former welfare minister who earlier this year forced Brown to water down plans to scrap the U.K.'s lowest band of income tax. In his newspaper article, he said that further tax cuts would also offer Brown a boost in popularity, perhaps enough to call and win an election in the first half of 2009.
An ICM Ltd. poll for the Sunday Telegraph showed Labour still trails the Conservatives, with 30 percent support compared with 43 percent for the Conservatives. At the same time, 40 percent of the 1,005 voters interviewed said that Brown is best placed to handle an economic crisis, compared with 38 percent for Conservative leader David Cameron. ICM conducted the poll Nov. 5 and 6. No margin of error was given.
To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net.
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