Jumpy governments should not be allowed to tinker with economic policies at times of crisis without a review of the potential effects.

In the US, president George W Bush wants to bolster the flagging economy with a $170bn tax cut. But as the budget has only recently recovered from a blow-out at the start of the decade, the contenders to succeed him may be wondering what public finances will look like by the time they arrive in the White House.

In the UK, the cash-strapped Treasury is looking for extra revenues by taxing the overseas earnings of ‘non-domiciles’ who divide their time between London and offshore tax havens. Or maybe not – business lobbies have raised the alarm that such a step could drive top investing talent away from the UK. The same groups are still scratching their heads after last year’s capital gains tax hike. This was ostensibly intended to close a loophole for super-rich private equity players, but left self-employed small businessmen fearing they too would be in the firing line.

Advice against panic

All of these measures are as much about winning political support as about providing economic support. This begs the question, however: at a time of economic uncertainty, would governments be better advised to avoid adding to confusion with panicked policy responses?

By their nature, tax systems are more often a product of accident rather than design, and each change appears to provoke a string of unintended consequences and economic distortions. The same risks used to exist much more widely in monetary policy; rate decisions taken jointly by the government and the central bank could be influenced by opinion polls as much as by business sentiment surveys. To take the political instability out of monetary policy, many countries have moved towards central bank independence in the past two decades.

The questions of whom to tax and how to spend public money will always be inherently political. But there does seem to be a growing case for a more robust system of independent review to determine whether the fiscal tinkering of jumpy governments at times of crisis will have the desired economic effects.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter