There was some good news in this timid Budget but we need a strategy for growth
IT’S hard to work out where George Osborne draws his lines in the sand. But, in so far as he draws them anywhere, yesterday’s Budget indicates he doesn’t always draw them in the right places. So, while there were some welcome steps in taxation policy, it seems nearly impossible to detect a coherent strategy.
Initially, the coalition was focused – almost exclusively – on deficit reduction, promising a balanced budget by about the time of the next election. Already, there has been slippage. With growth in the economy more sluggish than the chancellor had hoped, the response has not been to cut spending to stem the bleeding in the public finances, it has been to treat the comprehensive spending review as a fixed point and the deficit target as more of an aspiration.
Osborne muddies the waters by claiming to be “paying down the debt”. He is doing nothing of the sort. He is adding hundreds of billions to the national debt, he’s just gradually slowing its rate of growth. The chancellor could only start to pay down the debt today if he was willing to find an immediate £120bn or so of further spending cuts. And he isn’t remotely willing to.
If the sort of growth rates forecast by the Office for Budget Responsibility – namely, persistent growth of between 2 per cent and 3 per cent from next year onwards – fail to materialise, the government’s fiscal consolidation plans will be in tatters. Perhaps the OBR will be proven completely right. But its predictions to date have been on the optimistic side and it seems easier to imagine how things might go worse than expected than it is to imagine how they might go better. If a serious upswing in the economy does not materialise, the coalition will need to consider a second, more comprehensive spending review.
In terms of taxation, the Budget was always going to be fiscally neutral. It was to be a question of shifting burdens, not reducing them. But for nearly forty minutes, it didn’t look like we were going to get much of a Budget at all.
Osborne told us that for eight consecutive Sundays over the summer, we will be able to buy things from major retail outlets rather than being prohibited from doing so by the state. He had a lot to say about simplifying the tax rules, which seemed to hinge on exactly how to define a hot cup of tea or a chicken sandwich. There will be some new tax breaks for those who make computer games and also for cartoonists. A few modest infrastructure projects in the north of England got the green light. Buried away in the details of his proposals was a plan for reducing the VAT on ski lifts to just 5 per cent. These proposals might be good or bad ideas, but they hardly sounded like a determined plan to ignite growth in the economy.
Finally, he got to the meat of his proposals. And here there was a smattering of good news. The 50p rate was to be trimmed back to 45p. The politics of coalition government prevented the chancellor from abolishing the additional rate altogether. If he is to do so before the next election, this will be a chasm he will have crossed in two leaps. Unsurprisingly, the top rate had brought in considerably less revenue than its advocates had forecast and having one of the highest rates of marginal tax in the developed world is hardly easy to square with a desire to make Britain a thriving, business-friendly environment. The opposition benches were horrified, of course, but it is worth remembering that in 13 years of Labour government, they were content to have a top rate of just 40p for 99 per cent of their term of office.
A downwards acceleration in corporation tax also brought welcome news as did a promise to cut this to as low as 22 per cent in the years ahead. The Liberal Democrats’ cherished goal of a £10,000 personal income tax threshold is now just £800 short of being achieved. However, those on salaries a little over £40,000 won’t feel much of the benefit as the 40p tax rate is starting to kick in at a lower and lower level. If rewarding hard work and enterprise is a policy rather than a soundbite, this is a deeply worrying trend.
A hike in stamp duty to 7 per cent and the closing of loopholes around foreign companies’ purchases of property may appease those who believe we can all live off the tax receipt of tycoons who live in mansions, but are unlikely to raise substantial revenue for the Treasury.
Yesterday, Osborne had little room for manoeuvre. He used that room reasonably elegantly. But there remains too timid an approach on reducing public spending and too much of a hope that growth will somehow miraculously kick in to the economy if we just wait long enough. His Budget was littered with tactics, but weak on strategy. Not a bad effort, overall. But could do much better.
Mark Littlewood is the director general of the Institute of Economic Affairs. www.iea.org.uk