Adam Smith Institute

With confidence in the financial sector so low, it is perhaps inevitable that the world's big central banks had to step in and cut interest rates, and that the UK government intervened with more liquidity, guarantees on inter-bank lending, and the offer to recapitalize the banks by buying their shares. Most of the comment on this has been positive, but there are downsides too.

Let's remember that it is governments that got us into this problem – forcing lenders to make bad loans for social/political ends, printing money to keep the markets afloat through the dotcom crash and  9/11, and looking the other way while banks borrowed thirty times their assets. Are they really the best people to fix the problem?

The £100bn of extra liquidity that the Bank of England is pumping in, plus the interest rate cut, might indeed be enough to stop the hemorrhaging. Which is arguably fine, because the patient is critical. But it is no cure. It will produce a nasty inflation which, from past experience, will take still more time and pain to get rid of. And big government deficits, at a time when we need sound finances.

Nor is the immediate treatment exactly free. The government is going to charge the banks a fee for its guarantees. They're providing capital right enough, but it's expensive capital, which doesn't help the banks' profitability.

And now the government is becoming a big player in the banking business, owning a chunk of their shares. When can we expect this part-nationalization to end? If bank shares continue to perform poorly, it won't be able to sell; if the banks recover and their shares spring back, it won't want too.

Some time, the Tories' policy on tax has been to 'share the proceeds of growth'. As the economy grew, the additional tax proceeds that resulted would be shared between higher spending on public services and lower taxes. When the economy was actually growing, it seemed like a sensible policy. Over a couple of parliaments, it could have substantially reduced the state's share of GDP, without drawing any criticism for 'cutting services' – a sensitive subject for David Cameron's 'compassionate conservatives'.

Unfortunately, a looming recession has upset the Tories' best-laid plans. Given the likelihood of there being no growth to share the proceeds of, people have started to wonder whether a Conservative government would actually raise taxes to meet its spending plans.

I hope not. Yes, a downturn will depress tax receipts and unemployment may drive up social budgets. But there is plenty of fat to trim from the British state. More than enough, in fact, to be able to 'share the proceeds of saving' between lowering taxes and reducing public debt, without compromising core services. The Tories may be right not to offer up-front tax cuts at this stage, but they should also be clear that taxes will only go one way on their watch, and that's down.

Still, I am pleased the Cameron and George Osborne, his shadow chancellor, have declared themselves deficit hawks, rather than supply-siders. Yes, I strongly believe in the Laffer curve, the idea that tax cuts can spark economic growth and thereby offset revenue loss. But it's not a panacea. Firstly, not all tax cuts have equal dynamic effects. The most pro-growth are those on capital gains, corporate profits, and high-income individuals – all of which are a tough sell when people are struggling to make ends meet. Secondly, the 'crowding out' of private capital by excessive public spending is a much greater drag on the economy than tax rates are.

Cutting taxes and running up deficits to finance continued spending, while blindly hoping that economic growth will fill in the gaps, is terrible policy. Spending has to be brought under control first.

As Milton Friedman pointed out, there's nothing so permanent as a temporary government program. Once again we see the proof of this.

Consumer groups hit out at the European Commission after it moved to extend anti-dumping tariffs on shoes imported from China and Vietnam, arguing that the duties raised prices for their ailing members.

Ths duties were originally imposed for two years but they are now being extended. We know why, of course. Those who would benefit from the lifting of them are all of us. A highly dispersed constituency and one that's also not all that interested as we don't actually see the cost nor is it very high individually.

Those complaints came as the Commission formally announced an extension of the duties, imposed two years ago, under pressure from Italian shoe manufacturers.

However, those shoe manufacturers are very interested indeed and are those motivated to lobby for the protections at our expense. The nett effect is a transfer of wealth, from us the consumers to those shoe manufacturers. And as long as we have a politically driven system that decides upon such tariffs then we'll always have such groups attempting to get such legislative picking of our pockets and many of them will succeed.

It's one of the arguments for free trade of course: that if the power to shaft the consumer via import restrictions just isn't there then the consumer won't get shafted by such import restrictions.