George Osborne’s latest budget was, as expected, “fiscally neutral”. The Chancellor kept to his “austerity plan”, the aim of which is to cut the UK’s annual budget deficit to zero by 2016-17. As such, last week’s measures were presented as proof of the coalition’s “resolve” and “determination of act responsibly”.
I fully accept that, under tough political circumstances, the British government has devised, and so far broadly implemented, a plan to rescue the public finances from the absolutely disastrous state they were in due to Gordon Brown’s reckless spending and the global credit crunch.
Since the plan was launched in 2010, though, the zero-deficit target date has been pushed two more years into the future. The entire strategy also continues to rely on growth assumptions that, having always looked rosy, were made even more optimistic as part of this latest budget.
The post-budget headlines, of course, were driven by the specific measures. For all the rhetorical theatrics, these stunts and gimmicks, in fiscal terms, amount to very little.
Osborne showcased his budget as “an advertisement for investment and jobs in Britain”, that will help the UK “earn its way out of trouble”. Yet while the headline rise in personal tax allowances to £9,205 was welcome, it won’t really boost incentives to work, save and invest. The move cuts the marginal tax rate of fewer than 2m workers, out of around 30m. The limit at which the basic rate kicks-in will also be lowered, dragging up to 2m more not particularly wealthy workers into the 40pc tax band by 2015. So, not many incentives to earn and save there, then.
The main growth-promoting measure was a more rapid cut in corporation tax, to a relatively low 22pc by 2014-15. But headline rates are only part of the story. The UK offers rather meager allowances on fixed investments, which harms our manufacturing sector. At a time when many large British companies are hoarding money, we should anyway be encouraging them to invest, not helping them amass even bigger cash piles. Yet that’s what a corporation tax cut does.
The most politically explosive measure was the fall in the top rate of tax from 50pc to 45pc. Labour’s reaction, while predictable, was no less incoherent for that. This change affects just 250,000 people and, on the Treasury’s numbers, costs £50m-£100m – a rounding error in public spending terms. If cutting the top tax rate from the highest in the G20 to the third-highest in the G20 causes just a handful of big companies to move or stay here – which seems entirely plausible – it will actually boost revenues overall. And if a lower top tax rate is so “outrageous” and “immoral”, why did Labour keep the rate at 40pc for almost the entire duration of the 13 years they were recently in government?
The reaction to the so-called “granny tax” – the freezing of age-specific income tax allowances – was similarly juvenile. While this move will cost pensioners £220 a year on average by 2016, the losses are borne almost entirely by the relatively well-off.
Many current pensioners did extremely well during the decades prior to the credit crunch, not least from rising house prices that have made life difficult for today’s younger workers. No-one is denying there is some UK pensioner poverty. There are important policies to address this and numerous charities do excellent work to bring relief to the genuinely needy. But such poverty is limited to the poorest fifth of the pensioner population. This change won’t affect them in the slightest, as they don’t have incomes high enough to benefit from age-related allowances.
So far, pensioners have been largely spared from the welfare cuts and tax rises stemming from the austerity program. That’s unfair. If anyone wants to argue that pension savings have been disgracefully denuded by QE, or by Labour’s earlier pension tax raid, then I fully agree. But there’s nothing wrong with gradually re-aligning the tax thresholds of pensioners who can afford it with those of the rest of us.
While such budget measures generated thousands of column inches, they really are, at a time of genuine economic distress, of very little relevance. For all Osborne’s claims that his budget “changed the backdrop for investment and jobs”, the independent Office of Budget Responsibility put the pro-growth effect of the combined package at a mere 0.1pc of GDP per annum by 2016.
As ever, what really matters is the big picture. And, in fiscal terms, the big picture still looks extremely ugly. In February alone, the UK government borrowed £15.2bn – the highest borrowing of any February on record and up from £8.9bn during the same month the year before. And this is austerity?
Total borrowing, during the first eleven months of this fiscal year was £110bn. That’s slightly down from £118.9bn during the same period in 2010/11, but is still an absolutely massive number. Osborne said last week that the UK will borrow £126bn in 2011/12 as a whole, another £120bn in 2012/13, £98bn the following year and £75bn the year after that. In other words, over four years, our debt stock will rise by an eye-watering 30pc of current GDP.
Even these grotesque borrowing totals could turn out to be overly optimistic. That’s because they rely on a pretty rapid UK growth recovery, which may not happen. The official 2012 forecast was nudged up from 0.7pc to 0.8pc just before the budget. Growth of 2pc is predicted for 2013, rising to 2.7pc the following year and 3pc in each of the two years after that. This is, to say the least, an optimistic trajectory.
I find it strange that the official 2012 growth forecast was increased at all. Back in November, the OBR said it expected the Eurozone to expand 0.5pc this year, but it now foresees a 0.3pc Eurozone contraction. OK, the mood in the US has lately improved, but the eurozone is easily the UK’s biggest trading partner. Even if the single currency avoids meltdown, a stagnating European economy is a serious risk to the UK’s growth outlook, and therefore to our fiscal credibility.
Then there’s the spiraling oil price – which has just pushed petrol above 140p per litre. Expensive crude, again, could derail our fiscal rescue plan, not least as the UK is now an net oil-importer. Already during 2012, extra household fuel and utility costs have largely offset any benefit from the budget-day personal allowance increase. The Chancellor pays scant lip-service to dangers emanating from the eurozone and oil, yet continues to gamble Britain’s solvency on a robust and speedy recovery.
Osborne is, incidentally, also taking a major risk with the UK electoral cycle. The budget documents show that during the first two years of “austerity”, the government made £23bn of expenditure cuts (compared to the previous plan) and £18bn of tax rises – a combined £41bn adjustment.
A similar consolidation is planned for the next two years, but this time with £34bn of spending reductions and £7bn of tax hikes. In other words, the austerity program is “back-loaded”. Instead of bearing fruit, the squeeze gets worse as we go along.
Rather than getting the worst of the pain over with early, then, while the public is still on side, the UK’s spending cuts have so far been relatively small, but get more serious as the 2015 election approaches. Politically speaking, this may turn out to be rather cack-handed, especially from a Chancellor often lauded for his political nous.