Cut taxes to rescue recovery, BarCap says If the economy is left to recover under its own scant steam, the costs to society - through persistently high youth unemployment, for example - could be just as unacceptable as a failure to achieve a structural rebalancing. However, at present, policymakers seem willing to operate on the view that the worst is behind us. We believe there is scope for a measured fiscal loosening without provoking an adverse reaction from investors. Although some have characterised the UK's position in financial markets as being on a knife-edge, in reality the bond markets have shown no signs of concern with the UK government's debt position," he said. To stimulate demand, he recommended a temporary cut in VAT or a temporary increase in tax-exempt capital allowances to encourage corporate investment. "Unlike cuts in income taxes, which can be saved, these measures only cost the government money if they prompt more spending," he said. Infrastructure spending "also seems attractive," he added, as it "carries longer-term benefits for the economy's supply capacity [and] is also credibly temporary." Although long lead times are considered an obstacle, he said there are several "oven-ready" projects, such as the schools programme that could deliver quick returns. Alongside fiscal measures, he said the Bank should use QE to buy bank bonds rather than gilts, which would "help counteract the upwards pressure on bank funding costs from the euro crisis." Buying more gilts would have little effect on growth. It would be "more effective at boosting inflation expectations than at boosting demand," he said.