§ Mr. Raisonasked the Chancellor of the Exchequer what is his estimate of the effect on unemployment of reductions in (a) direct and (b) indirect taxation to the value of £100 million.
§ Mr. Joel BarnettEstimates of the economic effects of tax changes depend critically on which particular direct and indirect taxes are changed. They also depend on the assumptions made about the responses of the exchange rate, interest rates and earnings. If the exchange rate, earnings and nominal interest rates are all assumed to be unchanged a reduction in indirect taxation costing £100 million in a full year brought about by an increase in the married and single personal income tax allowances is estimated to raise GDP by 0.03 per cent. after four quarters. On the same assumptions a reduction in the standard rate of VAT costing £100 million in a full year is estimated to raise GDP by 0.04 per cent. after four quarters.
The relationship between gross domestic product and employment has been very uncertain in recent years and estimates of unemployment effects cannot be made with confidence. The relative reductions in unemployment in the two cases will be roughly proportional to the relative increases in GDP, although there will be a time lag. In the indirect tax case, where the GDP response is larger, the reduction in unemployment is unlikely to exceed 5,000 after eight quarters.