Budget 2012: The reaction
Instant reaction to Osborne's budget statement from John Phelan, Simon Miller and James Dowling
There’s a bit of a mixed background to today’s budget. On the plus side inflation was down yesterday and today the OBR raised its growth forecast for 2012 to 0.8 percent. On the negative side February’s borrowing figures came in at about double what was expected. The bigger picture is that UK government debt is up to just under £1 trillion. The British government’s overspending continues to frame the economic debate.
But debt is as much a political fact as an economic one. As such, Osborne’s challenge was to produce a budget which would keep politically opportune but economically silly things to a minimum and to stop political considerations stymying economically sensible measures.
He’s succeeded to an impressive degree. On tax the 50p rate, which economically ought to fall to 40p, will, owing to the politics, only fall to 45p. There’s also a new rate of Stamp Duty of 7 percent on homes worth over £2 million and a closing of the loophole that allows properties to be registered to offshore companies to avoid the tax completely. The ‘Tycoon Tax’ will have had jubilant tax planners working on a new range of dodges to sell before Osborne’s bottom touched the bench.
It says much for the desperate state of the Liberal Democrats that these morsels of gristle will be seen as ‘red meat’. Happily, they shouldn’t be too economically harmful.
More positively the raising of the tax free allowance to £9,205 which will lift 2 million people out of tax completely and leave 23 million basic rate payers £346 per year better off is an excellent policy which the Conservatives have gentlemanly allowed the Liberal Democrats to own.
Corporation Tax is down and, while it is disappointing not to see it reduced further, there can be no mistake in the business community about its future direction. The ideas of automatically raising the pension age in line with life expectancy and setting public sector pay locally are such no brainers it’s amazing they’re only being brought in now.
Labour’s line of attack will be that the top rate tax cut in unfair, but as they refuse to commit to raising it back to 50p, this will be easily batted away. It’s almost as good a budget as could have been expected given the exigencies of politics.
Osborne has had a difficult juggling trick to manage today. Politically he has had to extricate himself from Gordon’s leaving present of the 50 percent tax whilst at the same time convincing the markets that the deficit reduction plan is still working.
With much already broadcasted ahead of time, the key figures presented by the OBR gave George some bad news with February’s borrowing rocketing to £15.183bn, nearly double the amount a year ago and a net debt of 63.1 percent of GDP - doesn’t say much about austerity.
Even better, debt will now peak at 76.3 percent rather than 78 percent, so that’s alright then isn’t it George?
However, the OBR forecasts that the net deficit will reach 7.6 percent next year with the share taken by the state falling to 43 percent. In addition borrowing is also falling to £120bn next year and £21bn by 2016/2017. So far so good but it does worry me about where this money is coming from. Yes, borrowing rates are low, saving some £36bn in debt interest but there is a shadow of Gordon in some of the figures.
In gearing up for the privatisation of the Royal Mail, the government is taking on the pension fund.
The good news is that this adds £28bn to the government coffers. The bad news is that this is a one-off payment into the accounts.
What still exists is the £9.5bn deficit in the pension which conveniently will not be on the government books which is not only an uncomfortable reminder of Gordon’s follies with PFI but is also reminiscent of the pernicious accounting tricks carried out by Greece and Portugal that have been rightly condemned.
This deficit will continue to rise and so it doesn’t spell out much for the coalition's feted transparency over what goes on the books.
In another sign of Brownism, Osborne says that the lower rate of borrowing will be used to pay down debt, in reality it just means debt will rise slower - why not just tell the public this?
In addition, I do not think Osborne is really cutting. The fall in borrowing is down to receipts and the aforementioned borrowing rates as well as printing our way out of debt. This opens Osborne up to the fates; I still want to see proper cuts; get the deadwood out of the way. Any blip, be it a rise in borrowing rates or further falls in tax receipts, leaves these forecasts in a perilous state without true cuts.
True, national public sector pay rates may be abolished but will it actually happen? I have my doubts whether there is truly the political will to do this inside the coalition - hence the review.
What will the markets take from this? Is this a budget for jobs? Has Osborne done enough to convince rating agencies about his austerity plans? So far so good; the bond markets have hardly budged but the devil, as they say, is in the detail. He has walked the tightrope and appears to have not fallen but events elsewhere may give him, and the country, an almighty push.
The Budget had been so comprehensively leaked there was seemingly nothing left over.
Despite recent political headwinds, the overriding context remained the deficit and the need for George Osborne to show he is staying the course. In that respect, nothing much has changed since the Autumn Statement, and the decision by Moody's and Fitch to put the UK credit rating on negative watch arguably strengthened the Chancellor's hand.
This dictates the political logic of the Budget - the paramount need to demonstrate that any tax giveaways are fully funded, and that the Government has a credible plan for growth. Osborne sees a credible deficit reduction plan as an integral part of any plan for growth - a clear divergence from the Labour party. Consequently, Osborne emphasised from the start that this was a fiscally-neutral Budget, with any giveaway clearly funded through a combination of tax rises and yet further spending restraint - the Chancellor was clear that there were no deficit-funded giveaways.
Beyond this, Osborne's clear themes were competitiveness, simplification, and lifting the poor out of tax. As far as they went, these were mantras that all sides of the coalition could agree on. However, despite making much of the running ahead of the day itself, in many respects this does not feel like a Liberal Democrat Budget.
Osborne increased the personal allowance to £9205 - which the Liberal Democrats will present as a key concession. However, given that this increase only takes hold from 2013, and the implicit assumption in the coalition agreement had been that they would get to £10,000 by 2015, this does not feel like a huge advance on the pre-agreed policy.
There was, admittedly, some redistribution from the very wealthy - notably, through a new 7 percent rate of stamp duty on homes worth over £2m plus the punitive anti-avoidance measures against those who buy properties through companies. The Liberal Democrats could claim the credit for the new stamp duty rate (in due course, the Chancellor will presumably be happy to blame them for it). However, tax avoidance is not really a party political issue, as it is very hard to query the basic premise that people should pay the full amount intended by Parliament. Osborne called tax avoidance and evasion 'morally repugnant' - presumably he meant it.
On the other hand, the Chancellor offered a reasonable amount of meat to the Conservatives. Osborne was clear at the outset that this was an 'unashamedly' business-friendly exercise - and there were lots of measures in this vein. A reduction in the 50p rate (albeit, peculiarly, to 45p and in 2013) and a further reduction in the headline rate of corporation tax to 24 percent from this April, with a new goal of 22 percent by 2014.
The infrastructure investment will also be welcome, as will the new enterprise zones. And although there will be some disappointment that the August fuel duty rise is still going ahead, he did at least freeze VED rates for hauliers (possibly a rather token move), and confirm the fair fuel stabiliser when the price of oil goes over $75.
On potential difficulties - Osborne has presumably put child benefit to bed. However, he also announced a 'simplification' of age-related allowances which sounded suspiciously like a revenue grab. The Budget numbers on this will be indicative of to what extent this is likely to become a problem for the Government as the Finance Bill goes through.
The banks will also be disappointed - though resigned - that he has yet again denied them the benefit of the corporation tax cut. Down the line, successive decisions like this could create problems when organisations like HSBC or Standard Chartered review whether the UK is worth the candle.
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