No turning back: Four reasons Osborne's Budget matters
19 March 2014 11:11pm
FOUR key things strike me about the 2014 Budget. First, George Osborne stuck to his plan. Osborne’s Budgets will be remembered for two things: slow, steady, drawn-out spending cuts, bearing down gradually upon the government’s huge deficit; and a large rise in the income tax personal allowance. Both aspects were reflected in yesterday’s Budget speech.
The deficit continues to fall, little by little, but Osborne did not fall prey to the temptation to use faster growth and higher economic optimism as an excuse to have net tax giveaways or to loosen the spending purse strings. His motto was “Don’t let’s go back to square one.” Bravo.
Yet the other key leg of policy was also there, with another £500 rise in the income tax personal allowance. I suspect that, over the long term, Osborne’s income tax threshold rises might be regarded as even more significant than his spending cuts. We are approaching striking distance of excluding all income earned at the national minimum wage from income tax – a transformation that would have seemed inconceivable to most commentators six years ago, and achieved, somehow, despite our being in the worst fiscal hole ever. Really remarkable, an achievement that is not commented upon nearly enough.
The second key feature of the Budget was that, where there has been criticism, action was not lacking. Folk say there aren’t enough exports in the recovery. Well, Osborne announced a large rise in export finance. They say business investment isn’t recovering fast enough. Well, Osborne announced a big extension in investment allowances. Whether you approve of these policies or not (I disapprove), one could not claim that Osborne has used faster general GDP growth as an excuse to ignore the underlying issues.
The third key feature is the death of whatever was left of the UK government’s feeble attempts to persuade anyone we can and will prevent climate change by limiting CO2 emissions. Osborne changed the carbon tax system and introduced a set of subsidies for those that use a great deal of energy. The overall mix is now a nonsense – imposing levies which are offset by subsidies – and will surely be rationalised soon. But the message is clear: in a time of austerity, and with international energy security disturbed (Iran, Russia, Venezuela), the priority is cheap abundant energy, not cutting down on energy use to limit CO2 emissions.
That is simply a recognition of political reality. When China and the US rejected further moves to limit CO2 emissions at Copenhagen, international coordination of CO2 control died. And in a time of economic hardship, with the press full of stories of how the surface temperature of the globe hasn’t risen for nearly 20 years, the UK public appetite for making green sacrifices is exhausted. Mitigation RIP. The question now is: since we are not going to prevent climate change, how can we adapt to it? Osborne’s £200m potholes-mending budget, announced yesterday, somehow does not seem proportionate to the challenge. We’ll hear more on this topic anon.
Fourth, Osborne announced a revolution in pension savings regulation and taxation, including the end of mandatory annuities and the abolition of the 10p starting rate of tax on savings income. Mandatory annuities had become especially problematic, since the years to death that an annuity would pay out were rapidly lengthening, as life expectancy increases, at the same time as the interest rates received on bonds were distorted downwards by very low Bank of England policy rates and the impacts of QE. Whether annuities will continue to seem so unattractive when interest rates rise rapidly over the next few years remains to be seen.
Osborne has, with the exception of the 2012 shambles, delivered excellent Budgets all through this Parliament. Labour has not risen to his challenge. He taunted the Opposition with their past wrong predictions of a 1m rise in unemployment, and a few good jokes about Magna Carta, which they took in good humour.
Ed Miliband’s own speech was, by contrast, the most graceless and empty Budget response speech I have heard in many years. He made silly remarks about “tax cuts for millionaires” and droned on about Budget decisions from years ago, but failed to offer any response to this Budget at all. Responding instantly to a Budget speech is tricky, and the Leader of the Opposition should be cut some slack if he at least tries to engage with what was said. But Miliband didn’t. Everyone on Twitter had a gut, shoot-from-the-hip Budget response within five minutes. Why couldn’t Miliband’s advisers think of one?
Andrew Lilico is an economist.