The big picture is that nothing has changed. None of the policies outlined yesterday were revolutionary; none will jolt the economy out of its stupor. One or two will help on the margins; and one or two will damage growth. With the government more than half way through its term, this was Osborne’s last chance to think out of the box; sadly, he fluffed it.
The Office for Budget Responsibility (OBR) slashed its growth forecasts and upped its deficit and debt expectations; but it remains far too upbeat. It thinks that the economy will fall by 0.1 per cent this year and grow by 1.2 per cent next year (when real wages will drop again), which is at least plausible; but it then falls back into the trap of assuming that growth keeps on accelerating: 2 per cent in 2014, 2.3 per cent in 2015, 2.7 per cent in 2016 and 2.8 per cent in 2017.
Even though that would leave GDP 3.2 per cent lower in 2016 than the OBR forecast in March this year, it still sounds too good to be true. The reality is that weak growth is the new normal. Citigroup thinks GDP will grow by 0.8 per cent in 2013, 1.0 per cent in 2014 and 1.2 per cent in 2015, which sounds more like it. If these sorts of figures materialise, Osborne’s fiscal forecasts will be toast. In some instances, what appears to be the OBR’s optimism is actually bad news: it believes that domestic demand will be bolstered by a collapse in savings, with the household debt/income ratio rising again from mid-2013 and the household sector going back into the red from the end of 2015. If this does happen, it will mean that we have learnt nothing from the bubble and failed to rebalance the economy.
The government will be borrowing far more than previously hoped and will not meet its second fiscal rule, which was to start reducing the debt to GDP ratio by 2015-16. But Osborne’s claim that the budget deficit will fall this year is largely bogus. One-off items distort all of the figures: the government has taken over the Royal Mail’s pension; Bradford and Bingley and Northern Rock are being reclassified in the public accounts; and it has raided QE interest payments in a move that would have made Charles Ponzi proud.
Excluding all of this, the deficit is forecast to fall slightly from £121.4bn in 2011-12 to £120.3bn (including everything, the deficit collapses to £80.5bn and excluding just the Royal Mail it falls to £108.5bn). But the only reason that the deficit falls at all is that the expected one-off sales of the 4G spectrum have already been booked, cutting the deficit by another £3.5bn. If this were excluded, the deficit would be going up this year, not down.
It’s not all bad news. The larger than expected increase in the income tax free personal allowance to £9,440 from next year is a great move: it will help the working poor and make it more attractive for them to work. The freeze on petrol tax is another excellent move; this will help motorists and keep costs down for business. But the planned 1 per cent uprating of tax thresholds for income tax, capital gains tax and inheritance tax is a stealth tax raid. Incomes and capital values usually go up by more than this; inflation alone will be at least twice that rate.
Even more people will be dragged into the 40p tax rate (which in reality is even higher when national insurance is included), with the Treasury pencilling in an extra 400,000 people. The left will be outraged at the plan to limit the increase in benefits for people of working age by 1 per cent a year, but this follows a very substantial increase in recent years, when benefits rose at a much faster rate than wages. Osborne’s big mistake was that he failed to do this earlier and allowed the welfare budget to spiral. Crucially, however, pensioners will be exempted from these welfare cuts, a move which is likely to rekindle talk of a generation war.
Many readers of this newspaper will also be hit by the chancellor’s announcement on the restrictions on pension relief to £40,000 per annum, together with a reduction in the lifetime limit from £1.5m to £1.25m; these measures don’t kick in until 2014, however. This will increase some high earners’ marginal and average tax rates. This system is now very chaotic, with the goalposts changing regularly and long-term planning almost impossible to pull off. Perhaps now has come the time to kill off these kinds of saving schemes entirely and move instead to much larger Isas (whereby taxed income is put in a pot, with no relief, but on which interest and capital gains are largely untaxed) – or ideally, to a completely different flat tax system with no loopholes on income from capital and labour.
It is worth reminding ourselves why there has always been tax relief on pensions: first, because why else would anybody lock money away for so long; and secondly, and more importantly, because income is taxed when it is earned, is subsequently put in a pot and is then taxed again when it is taken out as an annuity. The idea was to tax it only once, at the point when it was taken out; but all reliefs create distortions, complications and avoidance schemes.
There was one unambiguously pro-growth reform, and that was the additional cut to corporation tax combined with the change to the annual investment allowance. Oxford University’s Saïd Business School’s Centre for Business Taxation has crunched the numbers. The cut in corporation tax from 28 per cent in 2010 to 21 per cent in 2014, combined with the earlier reduction in capital allowances for plant and machinery, will slash the cost of capital for large companies by 2.7 per cent. This will increase investment in plant and machinery by around 1.7 per cent.
The effect on small firms will be even greater. The extension of the 100 per cent Annual Investment Allowance for investment in plant and machinery to the first £250,000 of investment will lead to a 10.8 per cent collapse in the cost of capital for these small firms over the life of this Parliament. The scheme will last just two years; but keeping it permanently would result in a 7 per cent increase in investment.
But the same cannot be said of the myriad of corporatist new hand-outs to business announced. Why introduce complex, Brownite tax breaks for shale gas? Why not just get the government out of the way? We don’t need endless plans and schemes. Had Osborne been truly radical, he would have eliminated, not increased, the aid to private firms – and used all of the money to slash taxes. Sadly, he wasn’t that brave, and this Statement will soon be forgotten, yet another wasted opportunity to salvage the UK economy from what looks ever more likely to be a lost decade.