Tax cuts are a better form of stimulus than more spending

Greg Mankiw is one of the best academic economists out there and having been chairman of the Council of Economic Advisors has a good sense of how to turn theory into policy. His column last weekend in The New York Times is essential reading for anyone wondering about how Britain can avoid a double dip recession. In it, Mankiw summarises the recent academic evidence which shows that cutting business and income taxes is a more effective form of stimulus than increasing spending.

The challenge for Osborne in drawing up his first Budget, if the Tories win, will be how to foster a private sector stimulus for the economy. Without that we could easily end up in double-dip recession, something that would doom the Tories. It is encouraging that the Tories will lay out plans to drastically cut corporation tax. But there need to be other policies designed to get the private sector engine of the economy working again.