THE day after the Budget, much of the focus is on what the chancellor actually did. But it is also interesting to consider what he did not do.
The first thing that George Osborne did not do was to try and claw back the shortfall in his deficit reduction plan. In future years, borrowing is forecast to be higher than the Office for Budget Responsibility expected just a few months ago in the Autumn Statement. In 2014-15, the final fiscal year of this Parliament, government borrowing is now forecast to be £108bn, nearly 6 per cent of GDP. And the date at which the ratio of public debt to GDP reaches a peak and starts to fall has been pushed out to 2016-17 – to the next Parliament.
Part of this rise in borrowing reflects the weakness of the economy, which is having a knock-on effect on tax receipts. In terms of the short-term economic outlook, the chancellor was probably right not to try and claw this back in the short term. But it does mean that a lot of the government’s deficit reduction plan will need to take place in the next Parliament – and more radical options for public sector reform may need to be considered to achieve necessary long-term deficit reduction.
Another thing that the chancellor did not do was embark on any major new reforms of the tax system. He is pressing ahead with his reform of corporation tax, and is bringing down the rate to 20 per cent, which creates a very competitive corporate tax regime for the UK. That should be helpful in terms of encouraging overseas businesses to invest in the UK and locate activities here.
But other areas of the tax system are much in need of reform – personal income tax, VAT and environmental taxes. An overhaul of reliefs and tax exemptions – possibly reviewing the large number of items which are zero-rated for VAT – could lead to a much more efficient system, with lower tax rates and better economic incentives. With the election only a couple of years away, and last year’s unfortunate experience with the “pasty tax” and “granny tax”, it is understandable that the chancellor did not want to grasp this nettle now. But again, this is something that should be on the agenda for the next Parliament after 2015.
A third area which the chancellor did not say much about in his Budget was how he might try and help savers, who have been squeezed by low interest rates and persistently high inflation. In the introduction to his Budget, Osborne talked about the need to encourage saving, but at various other points in his speech he spoke of the benefits of keeping interest rates low. He also made some changes to the remit of the Bank of England Monetary Policy Committee, which could be seen as further softening the focus on stable prices and low inflation.
So while there were a lot of helpful measures in the Budget – for low earners, large and small businesses and people trying to get on the housing ladder – there is still a lot of unfinished business for whoever wins the next general election.
Andrew Sentance is senior economic adviser to PwC and a former member of the Bank of England’s Monetary Policy Committee.