THIS amounted to a pretty feeble Budget from an increasingly embattled chancellor. His initial plan to eliminate the deficit by the end of this Parliament now looks like a mere pipe dream from a faraway land. The government is overspending by well over £100bn per annum and will probably continue to do so for the next few years.
The coalition hasn’t followed the lessons of successful fiscal consolidations in other developed countries – act early, decisively and dramatically. Don’t attempt to make savings by salami-slicing individual departmental budgets, but find whole areas of state spending you are willing to axe. It is almost as if George Osborne believed that tough political talk and aggressive rhetoric would be enough to solve the deficit problem he inherited. Instead, having only found feeble savings in overall spending and having based his strategy on wildly optimistic economic growth forecasts, the chancellor finds himself with no room to make the sizable tax reductions the economy badly needs.
In opposition, Osborne made it plain that he believed in flatter, simpler taxes. He has either changed his beliefs or is drawing up his budgets based on somebody else’s. Taxes are tending to get steeper not flatter, and he seems incapable of resisting a range of tweaks and fiddles that pile ever-increasing pages onto Britain’s bloated tax code.
You don’t need to be an astute economic historian to recognise that the Help to Buy scheme – assisting buyers of new homes with government loans – is fraught with danger. The coalition has failed to be anything close to bold enough on liberalising our antiquated planning system, which would be the real key to unlocking the problem of obscenely high housing costs. Osborne has at least started to talk about supply-side reform, but is unwilling to embrace the sort of original thinking we desperately need.
The National Insurance rebate of £2,000 may act as a small boost for employers – but it has all the hallmarks of a policy that is essentially intended to be “eye-catching”. Similarly, there are obscure tax reliefs for the ceramics industry and for producers of “high end” television. The chancellor’s focus should be on reducing tax rates, not looking for tax exemptions. His approach risks being a boon for accountants and lawyers, as well as encouraging yet more highly imaginative and contrived tax planning.
There are a handful of welcome announcements, of course. Driving down corporation tax to 20 per cent isn’t just a pro-enterprise policy, it is a simplifying step that brings the small profits rate in line with the main rate, and helps to remove distortions in the tax system. Hitting the brakes on the fuel duty rise was a widely-trailed move – but is no less welcome for being unsurprising. Beer drinkers will toast a penny off a pint – although those who prefer a glass of wine or still have the audacity to smoke tobacco continue to be hit far too hard.
Accelerating the rise in the income tax threshold to £10,000 will be welcomed, particularly by lower earners. But far too many are being dragged into the higher 40p band and no steps have been taken to remove the anomaly of the highest rate of tax kicking in at £100,000 due to personal allowance withdrawal. The 45p additional rate is clearly here to stay, at least until 2015.
Osborne’s initial fiscal strategy has slipped so badly that it is almost unrecognisable from his original 2010 plan. But there might be even worse to come. If the Office for Budget Responsibility’s (OBR) future growth forecasts prove to be as hugely over-optimistic over the next three years as they have been for the last three, the chancellor will find himself in an even bigger hole. To date, the OBR has tended to tell us that things will be tough this year, but will improve markedly next year and even more so the year after. But, so far, tomorrow has never arrived. Were the economy to limp along at GDP growth of less than 1 per cent between now and 2015, rather than accelerate through the 2 per cent barrier as the OBR’s chairman Robert Chote now believes is achievable, it is hard to imagine what sort of story Osborne will be able to put to the electorate before polling day.
This was a small, complicated, rather trivial budget. It is not wholly without merit, but it is not going to do anything significant to bring about economic growth. If the government is incapable of more radical and structured economic thinking, it is likely that in the years to come we will all be crying into our slightly cheaper beer.
Mark Littlewood is director general of the Institute of Economic Affairs.