Smarter spending not more spending is what we need

The business editor of the Times, David Wighton, wonders whether rate cuts are really going to help the economy.

The Bank of England rather missed the point yesterday. Not because it cut base rates to 1.5 per cent, instead of the 1 per cent many pundits had expected, but because lowering interest rates will do little to revive the flagging economy.

I have to say that I tend to agree - what is the point of lowering the interest rates at the moment? I really can't see what they hope to achieve.

As Justin King, the chief executive of Sainsbury, said yesterday, it is not how much you have to pay to borrow that is the issue, it is that there is no money being lent in the first place.

That is so true. For instance, people were quite happy to take out mortgages at 6, 7 or 8% - and when I started my first mortgage it was considerably more than that - it's just that nobody is lending money at the moment. They are not lending money because there is no cash to lend - it's because they are concerned that they won't get it back.

Wighton goes on to say that the interest rate cut will have some effect, but I'm dubious personally.

The cut in base rates will have at least some impact on the economy. Millions of mortgage borrowers will see their monthly bills fall and some of this should feed through into higher spending.

I seriously doubt this. I expect many will do what I'm doing - keeping their payments the same and paying off more of the loan. Most people will do this because the key at the moment - for the average person - is debt reduction. Any extra cash people have available through reduced interest rates will be used to reduce whatever debt they have built up - and in a lot of cases that debt is considerable - but they will also find that money freed up from lower interest rates will be quickly swallowed up by increases in council tax and energy/water bills.

So if interest rates is not going to boost the economy, what is? To Wighton's credit he does ask this question and does attempt to answer it.

If rate cuts are largely beside the point, what is the answer? Almost certainly more taxpayers' money. Although the Government has ploughed billions into the banks already, it may have to put in more. So far it has invested a sum equivalent to 2.5 per cent of economic output. In previous banking crises, governments have had to fork out four times as much.

I disagree with him for the most part. Yes, it is important for the government to spend taxpayers money on things that will stimulate the economy, but it is not necessary to take MORE taxpayers money to do that. If anything, the thing to do is cut taxes so that people really do have more cash in their pockets to buy things with. Modest tax cuts on indirect taxation - such as the VAT cut and the Tory idea of tax cuts on savings will do little to boost the confidence of people to spend cash, but direct tax cuts that physically puts more cash into peoples wallets will.

The government needs to get smart with taxpayers money. It needs to stop wasting the vast sums it spends on ineffective and unnecessary schemes and divert the cash to areas where it will boost the economy and provide a decent return on investment. Building schools, hospitals, roads and so on might mean a boost to the construction industry, but ultimately it is dead money. Those things do not give an income boost to the economy once they have been completed - just the opposite in fact - and that is where the idea of more spending on capital projects ultimately flounders.

Manufacturing is the key to an economy. It always has been. It is too late to do anything now to alleviate the short term problem, but there is much the government could do in the longer term if only they could think beyond the next election. As I've said many times before, a nation that makes nothing is worth nothing. While the world was riding the global economic boom we could kid ourselves that we can do without manufacturing and maintain a service based economy. Now that boom has come to a crashingly spectacular end the reality is starting to hit home.