YOU must hand it to Alistair Darling: to have to unveil a budget deficit of 11.8 per cent of GDP, roughly the same as Greece’s, would have destroyed a lesser politician. The fact that he was able to portray such an abysmal outcome as a triumph is the final proof that contemporary Britain is now firmly in denial about the state of its economy and society. The deficit is so huge that Darling will have to borrow more in 2009-10 and 2010-11 (£166.5bn and £163bn respectively) than his entire income tax take (expected to yield just £146bn next year). Our national debt will rise from £617bn last year to £1.406 trillion in 2014-15, peaking at 74.9 per cent of GDP, even on his laughably optimistic numbers.
There wasn’t much that was new in the Budget – after all, most of the tax hikes that will start to bite in two weeks’ time had already been pre-announced, not least the 50p tax rate, the elimination of the personal allowance for those on over £100,000 and the crackdown on pension tax relief. But that didn’t stop Darling from launching yet another raid on the better-off, with his new 5 per cent stamp duty on homes worth £1m or above. There was time when aspiration was rewarded in Britain; this is no longer true. Individuals are being double or even triple-taxed on the same income. At least the stamp duty hike is not as damaging as Vince Cable’s mansion tax, a purer and more devastating form of wealth tax.
There were other sneaky tax hikes: personal allowances were frozen at £6,475, even though retail price index inflation is at 3.7 per cent. The gain to the exchequer from not increasing all tax allowances in line with inflation will be £2.2bn in 2010-11. Inheritance tax bands will be frozen for four years, which means that its yield will surge as wealth rises, partly as a result of inflation.
The fundamental problem with the Budget was that it failed to map out a credible plan for Britain to stabilise its national debt. Darling published a series of guesstimates for public spending and revenues over the next few years; yet there is little chance of these ever materialising. The Chancellor’s growth forecasts from next year onwards remain far too optimistic, his assumption that the tax take will increase significantly as a share of GDP without the need for higher tax rates is equally dubious and the spending figures mask steep cutbacks to departmental budgets that only truly determined politicians would ever be able to push through.
As I have repeatedly argued, the GDP growth prediction of 1.0-1.5 per cent in 2010 does make sense, but 3.0-3.5 per cent in 2011 (albeit revised down from 3.25-3.75 per cent) remains excessively optimistic. It is also almost inconceivable that the economy will grow by 3.25-3.75 per cent in 2012 and thereafter. The Treasury is also too optimistic in forecasting that exports will increase by around 3 per cent in 2010 and 4.25 per cent in 2011, despite the lower value of sterling.
State spending is forecast to fall from 47.9 per cent of GDP in 2009-10 to 42.3 per cent in 2014-15 (these figures are always massively lower than the OECD’s internationally comparable stats, which suggest we are now at 52 per cent of GDP). This 5.6 per centage point decline is theoretically doable – after all, Margaret Thatcher cut spending from 47.8 per cent of GDP to 38.9 per cent between 1983-84 and 1988-89, but that was at a time when the economy was enjoying a supply-side revolution and much lower inflation. It won’t help that Britain’s net contribution to the EU will reach £6.6bn in 2010/11, over twice the £3bn paid in 2008/09.
One way Darling wants to reduce the deficit is by slashing capital spending from 4.9 per cent of GDP in 2009-10 to 2.6 cent by 2014-15, a shame given that capex is the only kind of state expenditure that can actually boost growth sustainably. The overall deficit is meant to fall to £74bn in 2014-15, 4 per cent of GDP.
All of this conceals a very dodgy manoeuvre from the Treasury: because it cut the forecast for economic growth next year, and because revenues were a bit higher than expected this year, Darling was able to claim that the structural budget deficit will now fall at a much faster rate – from 8.4 per cent of GDP this year to 2.5 per cent of GDP in 2014-15. This is one of those devices developed during the Brown years, a statistical sleight of hand which allows Darling to claim that he has almost completely regained control.
In truth, he hasn’t: he has merely engaged in statistical shenanigans to placate the markets by pretending that the deficit is cyclical, rather than a structural crisis caused by years of profligate over-spending.
There was much glee that the Debt Management Office now expects that net gilt sales will drop from £211bn in 2009-10 to £148bn in 2010-11. But in the absence of quantitative easing, the amount private buyers will have to absorb will soar from £28bn this year to the full £148bn in 2010-11 – which as Simon Ward of Henderson Global Investors points out, is well above the previous record of £110bn in 2008-09.
This points to yet another questionable assumption – which is that Darling will be able to raise these funds cheaply, keeping costs down. Net interest payments by the exchequer will supposedly only rise from 1.9 per cent of GDP in 2009-10 to 3.3 per cent by 2014-15. This however assumes an average interest rate of only 4.4 per cent, which sounds too optimistic. Each percentage point rise in the average interest cost would boost the 2014-15 net interest bill by 0.7 per cent of GDP, forcing massive cuts to departmental spending to compensate.
Bringing in a stamp duty holiday for the next two years for properties costing up to £250,000 is to be welcomed. But there is a reason why the housing market is so sluggish at the moment and why first-time buyers have dropped to 25 per cent (down from a usual 40 per cent) of the total market: credit is priced more sensibly (with bigger deposits needed) and above all prices are still massively over-valued. It would be a disaster were more buyers to be encouraged to jump into the market as a result, and prices subsequently fell back, pushing large numbers of people into capital losses and even negative equity.
Some policies were unambiguously good, especially the increase in entrepreneurs’ capital gains tax relief to £2m. The chancellor’s decision to increase ISA limits in line with inflation is a welcome shift. The planned 3p hike in fuel duty due for next month will be staggered, with 1p increases in April, October and January – but this won’t change anything and is purely a short-term electioneering move.
The doubling of the annual investment allowance to £100,000, saving small companies up to £10,000 a year and the self-employed £20,000-£25,000 is a small step in the right direction. The reduction in business rates will be welcomed by many and see up to 345,000 firms pay no rates at all next year, albeit only for small properties. Yet these are micro-policies which only help on the margins; for many, the rise in national insurance, income tax and the rest will swamp all of the Budget’s good points.
Britain is falling behind in two key areas: we are now a highly taxed, anti-wealth, anti-aspiration and anti-hard work country. We are no longer an attractive location for business.
We are also falling behind other nations’ deficit reduction plans: Italy and Greece plan to cut theirs to below 3 per cent of GDP in 2012, Portugal and Spain plan to get to 3 per cent or less in 2013, and Ireland wants to get below 3 per cent by 2014. Yet we will still be at 4 per cent by then. This was a phoney Budget; we will either get the real thing after the election – or we will face a debt and sterling crisis. And one other thing is certain: this will not be the last Budget of 2010.