It’s both ironic and appropriate that George Osborne’s budget should be presented on the UN’s International Day of Happiness. Ironic, because, though disguised by slick and astonishingly confident presentation, for Osborne the budget is loaded with “news of fresh disasters,”(well, not exactly fresh, we knew already: growth forecast down, borrowing forecast up, AAA rating lost – though he didn’t mention that last one.) Appropriate because, as every year, the budget produces an unedifying orgy of navel gazing as to who will gain (beer drinkers with a penny off the pint, ) and who will lose (public servants, with a wages held below inflation for a further period) the odd pound or two, which the British public are misguidedly convinced will make them happier or do irreparable damage to their lifestyle.
The importance of the budget has long been overblown, but, for what it’s worth, it should be judged on the following criteria:
Is its over-all effect appropriate to current conditions? In other words will it stimulate the economy in a recession or dampen it down during overheating?
No. Osborne is relying on an “active” monetary policy, which has been the policy since he took office, and the money, rather than being active, has remained inert in the banks, shoring up their balances. There are signs of some Vince Cable influence, such as £1bn for infrastructure improvements, and £3.5bn for “shared equity homes,” but these, though better than nothing, are modest compared with what is needed. The tax cuts for high earners, and the Liberal Democrat policy of raising the income tax threshold to £10 000, may provide some stimulus, but are probably not as immediately effective as a cut in VAT. Osborne admits that the budget is fiscally neutral, so there is no effective fiscal policy to create a Keynesian multiplier to stimulate demand, growth and employment.
Does it made our society more equitable?
The cuts in welfare benefits for the most needy remain, and the freeze on public service pay will put increased pressure on the many who are at the bottom of the pile. The tax cuts for the highest earners, from 50% to 45% remain, but the £1.200 help towards child care apparently does not apply to those receiving tax credits, though it does apparently apply to households where two adults are not earning more than £1 500 a year, (and that’s each! ) Profits tax is to be reduced by a further !%. So regression rather than advance on fairness.
Does it nudge consumption away from “bads” and towards “goods”?
The penny off beer might help slow down the closure of pubs, which I suspect the majority, though not all, would regard as a “good.” Other alcohol duties are to continue to increase, which I, as a red wine drinker, can cope with. However, the planned increase in fuel duty is scrapped, which will be popular, but is wrong. We really must grasp the nettle and become less dependent on oil: it is cowardice for neo-cons, who believe in the price mechanism, to run away from using it in this vital area.
Housing being a “good,” the stimulus to the housing market is to be welcomed. However, much was made of helping young people onto the “housing ladder,” financed by mortgage guarantees for those unable to afford a deposit. This is surely going to promote more of the unsustainable private debt that got us into the economic mess in the first place. Permission for local authorities to borrow to build affordable homes would have been better. We need to move away from seeing houses as “cash cows” to “homes as places to live.”
Does it nudge production away from what the markets used to demand to what they are likely to demand in the future?
The implementation of most of Lord Heseltine’s recommendations for regional development, and the cut in the liability of small firms to pay NICs (a tax on jobs) could well stimulate investment and innovation. This is probably the most positive and far-reaching part of the budget.
Will it lead to a long-term balancing of the public finances?
No, by Osborne’s own admission the National Debt will rise, over a “rolling cycle of five years “, from 75.9% of GDP to 88.9% and then settle at 84% by 2017/18
The budget has some good features, but they nibble at the edges. The one completely praiseworthy feature is the retention of the 0.7% target for aid to the poorest countries (though any kudos in actually keeping this promise, first signed up to over 40 years ago, was spoiled by a caveat that we must be careful, as GDP stagnates, not to exceed 0.7%). Whilst I suspect there is now a recognition that it is growth rather than cuts which will reduce the government’s current deficit, the reliance continues to be on a loose monetary policy, in spite of its failure, rather than bold fiscal stimulus. The message of planned consolidation and more equitable sharing of what we already have, prosperity without growth, isn’t even on the agenda.