Nice ideas, but chancellor’s plans are smudged by fine print

Allister Heath

FISCAL responsibility is back – or so the chancellor would like us to believe. While the Tories shamefully backed Gordon Brown’s irresponsible policy of running budget deficits during the boom years, they have learnt the lesson the bitter way.

George Osborne is at pains to convince sceptics he wants not just to reduce the deficit but eventually to start tackling the national debt.

The problem, as ever, lies in the fine print and in the unfortunate fact that it is outcomes, not aspirations, that matter.

The Tories will “aim to achieve an absolute surplus in the next parliament, provided the recovery is sustained”, Osborne announced, and wants capital spending to grow at least in line with GDP.

The first part of the promise is so heavily couched as to, sadly, be meaningless. But it is another sign of the positive influence of the excellent Sajid Javid, the up and coming Treasury minister, on Osborne’s thinking.

It’s the right sort of aspiration, smacking at best of a genuine fiscal rule or at least of a still revolutionary commitment to surpluses in boom time and deficits in recessions, rather than deficits all of the time.

Yet I doubt that it will happen, just as Osborne’s previous plan also failed: he wanted to start slashing the national debt as a percentage of GDP by 2015, which will not now happen; his latest plans are stricter as they are in cash terms but still involve kicking the can further down the road, and merely extrapolate from current deficit trends. This new rule may also make it even harder to push through supply-side tax cuts (it shouldn’t, but could still be invoked in this way).

As to the second part of the pledge, the Budget projected nominal GDP will rise 18.1 per cent between 2013-14-2017-18, Citigroup calculates, while gross public sector investment will rise 10.4 per cent and net public sector investment 6.6 per cent.

Citi’s Michael Saunders calculates the chancellor would need to lift capex by £3bn-£4bn a year by 2017-18. That sounds like a good idea until one realises the cash will probably be squandered on wealth-reducing projects such as HS2.

It is also clear that the much-vaunted marriage tax cut won’t help that many couples.

The Institute for Fiscal Studies calculates that just 3.4m (28 per cent) of the 12.4m couples in a marriage or civil partnership will benefit; only couples where one pays the basic 20p tax rate (in other words, income below £42,285 by 2015-16) and the other earns less than the personal allowance (set to reach £10,300) a year are eligible for at least something, with the transferable allowance capped at a maximum of £1,000.

Around 2.3m of the 3.4m eligible families have someone in work; the rest are pensioners.

While good news for the winners, there is a massive drawback. Assume you earn £42,285 in 2015, £1 below the rate at which the 40p tax rate will kick in, and that your spouse stays at home to look after children: you will enjoy a £200 tax cut compared to the present situation. So far, so good.

Then assume you get a £1 pay rise, taking you to £42,286 – you will suddenly lose your entire tax allowance and pay £200 more tax, making you over £199 worse off.

People just below the 40p tax threshold will be reluctant to accept anything other than a big pay rise. There will be a range of income over which the marginal tax rate is well over 100 per cent.

Economists call this a knife edge; it makes no sense. There are good ways in which the income tax system can once again begin to tax families as a unit, not just individuals; this already happens with inheritance tax and capital gains tax, as of course it also does with the benefit system.

This, sadly, is yet another wasted opportunity.
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