Just one thing: cut national insurance

IPPR tells George Osborne what it wants to hear in the 2012 Budget.

IPPR tells George Osborne what it wants to hear in the 2012 Budget.

If George Osborne does one thing, he should cut employees' national insurance contributions by 2 per cent for the next two years.

Barack Obama implemented a similar payroll tax cut in the United States in 2010 and it has subsequently been extended - with support from Republicans and Democrats - until the end of 2012. The results are startling. While consumer spending in the UK shrank by 0.8 per cent in 2011, it increased by 2.2 per cent in the US. As a result US GDP increased by 1.7 per cent, more than double the puny 0.8 per cent gain in the UK.

The UK does not face a debt crisis; it faces a demand crisis that is the result of public spending cuts, cautious businesses and squeezed consumers. The economy will only grow again when demand picks up and that will only happen when consumer spending accelerates. Lower inflation during 2012 should mean this year is a little better than 2011 in this respect, unless there is a further sharp increase in the oil price. But a 2 per cent cut in national insurance contributions would help secure a better outcome.

Crucially, the prospect of stronger consumer demand would also provide a fillip to businesses. Large businesses in particular are sitting on huge piles of cash which they are unwilling to spend - either on new business investment or on hiring more workers - because the demand outlook is poor. A cut in National Insurance contributions would help to turn sentiment more positive.

If the Chancellor is worried that the cost of cutting National Insurance contributions - around £7 billion a year before taking account of the extra revenues that would be generated as a result of stronger growth - would spook investors in the UK bond market, he could recoup most of the cost over a six-year period by introducing the Liberal Democrat's mansion tax.

Tony Dolphin is the Chief Economist at the Institute of Public Policy Research

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Tony Dolphin is chief economist at IPPR