A useful but schizophrenic package

Allister Heath
SOME of the early reaction yesterday was that this was a slightly boring, forgettable Budget. Nonsense. It was far-ranging: radical in parts, brilliant at times, occasionally awful, way too political and often quite surprising. It wasn’t quite the Budget for growth that George Osborne should have delivered: populism all too often got the better of economic soundness, while the Lib Dems, membership of the EU and analytical confusion meant that its radicalism was blunted. Far from being a simplifying Budget, it

further complicated the tax code with its Gordon Brown-style proliferation of complex, fiddly micro-measures.

First, the good stuff. Entrepreneurs will now be taxed at 10 per cent on their first £10m in capital gains, up from £5m previously, a huge increase in the incentive to set up a new business in the UK. The accelerated cut to corporation tax from 28 per cent to 26 per cent in April, with further cuts of 1p a year until it falls to 23 per cent by 2014-15 is to be applauded. There are plenty of other related improvements on tax, some of which could lead to some companies moving back to the UK. Other good changes include a shake-up in planning rules – though we will have to wait and see whether this genuinely makes developments easier. Other pro-enterprise rules were more gimmicky. The Chancellor committed himself to simplifying tax rules, but only chopped 100 pages from our 11,520 page tax rulebook and has added many more. He stated a desire to relieve business from the burden of regulation. But even on his own numbers, the burden is only being decreased by 0.4 per cent, the Institute of Economic Affairs has calculated.

Osborne’s pro-enterprise policy is schizophrenic. Entrepreneurs are hugely incentivised – but other top executives, even if they are creating just as much wealth by successfully growing firms on behalf of owners, are being hit with a rise in direct tax to 42 per cent and 52 per cent above £150,000 a year from April, thanks to the special new rate of national insurance. It was good that Osborne confirmed that the top rate of tax was just temporary – but why did he ask HMRC to assess whether it was raising any revenue? The taxman will never back a tax cut. Another contradiction was that while most firms were given corporation tax cuts, national insurance – a tax on jobs – is still going up. It’s a case of robbing Peter to pay Paul – and often Peter and Paul are actually the same person.

Business needs stability and predictability. Yet on top of his sensible measures, the Chancellor also unveiled a series of smash and grab raids on sectors of the economy the public dislikes: banks, oil and gas firms and electricity companies. The huge hike in the extra profit tax from 20 per cent to 32 per cent on the oil companies came as a shock to the markets: why bother investing if you get hit by much higher taxes when your gamble eventually pays off? Companies had been using some of their North Sea oil profits to explore further afield. When Brown raided the North Sea last time, exploration stopped and it was a disaster for Britain’s energy supplies. Banks are being hit with yet another increase in the bank tax to prevent them from benefiting from the cut in corporation tax – it is now the second time their levy has been raised, most recently just a few weeks ago. The lower corporation tax and the controlled foreign company changes may lead to some firms relocating to London – but this latest hit on banks may yet tip one or two over the edge. While the Budget is un-green in that it helps motorists – an excellent move – it is greener than ever when it comes to electricity consumers, who will have to pay more following the imposition of a carbon tax.

The Office for Budget Responsibility’s decision to cut the growth forecast to 1.7 per cent this year was sensible. The reason:?higher inflation, which is eroding take-home pay and hence consumer spending. The Bank of England’s failure to keep control of inflation is having a real, direct cost: this is something that the doves, who are paranoid about the impact on growth of higher interest rates, ought to mull over.

Growth is predicted at 2.5 per cent in 2012 and 2.9 per cent for each of the two subsequent years. Such figures are not wholly fanciful, of course, and they still imply the UK economy will be 0.75 per cent smaller than previously thought in four years’ time. But the reason the OBR sees such a bounce-back is because it thinks there is a lot of spare capacity in the UK economy, a doubtful assumption. A better reason would be that the relatively big cuts in public spending as a share of GDP, combined with his supply-side measures, may have started to boost private sector growth permanently by then. Let us hope that this does happen – but the real worry is that Britain’s public finances rely massively on year after year of accelerating growth. If this doesn’t materialise, perhaps because of external events, Osborne’s entire project could collapse.

Where the OBR may be too pessimistic is on jobs. Between 2010 and 2015 it expects total employment to increase by only 900,000, a figure which seems on the low side. This comprises an increase in private sector employment of around 1.3m, partly offset by a reduction in general government employment of around 400,000 between 2010-11 and 2015-16, a five year period. The reason for my scepticism is that the economy supposedly grew by just 1.3 per cent in the 2010 calendar year – and yet during that time the private sector created 428,000 jobs, leading to a net rise in jobs of 296,000 after 132,000 public job cuts. Stronger growth ought to mean increased job creation. Yet the OBR is actually predicting that employment will fall by 100,000 overall in 2011-12, suggesting that the private sector will add zero jobs. If true, this would be a disaster for the coalition and a triumph for Ed Balls – but it just doesn’t make sense given the still decent growth forecasts. So if the OBR is right about overall levels of growth then it is probably underestimating jobs significantly – but all bets are off if it is over-estimating the recovery in later years.

Expenditure will be quite a lot larger than previously predicted. The biggest driver is the cost of debt interest: in 2011-12, this will be £4.7bn higher, because some gilts have coupons linked to inflation. Total public spending will rise from £694.4bn this year to £710.4bn in 2011-12, £720.7bn in 2012-13, £730.1bn in 2013-14, £743.6bn in 2014-15 and £763.8bn by 2015-16. Spending in five years’ time will be around £6bn per year higher than previously expected and the national debt will be £44.5bn higher. But despite the higher cash expenditure, higher inflation also means that total public spending will still fall by 3.7 per cent in real terms over the next four years, roughly the same cut as before.

Osborne was right to stay the course on spending. It is just a shame that his pro-growth message couldn’t have been clearer and less tainted by populist diversions and the urge to fiddle. On balance, however, Britain will be a better place to do business after this Budget – the question is whether the improvement will be large enough to make a real difference.

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