There is some good news in the Pre-Budget Report. The VAT cut is good news to the extent that it puts money back in the hands of ordinary people. With the tax burden having increased (PDF) by 51% in real terms in the last ten years, with charges for many services rising at the same time, we deserve a break. If people can be encouraged to increase their spending a bit that might provide some relief to retailers, in particular, as well.
I spent yesterday out with Sky responding to changes in motoring taxes, hence this post arriving somewhat late. The delays to the changes in Vehicle Excise Duty are also welcome. At the TaxPayers' Alliance, we have been pointing out how these changes will hit ordinary motorists since the day of the budget and any delay in their introduction will ease the burden . Sadly the Chancellor is once again giving to motorists with one hand and taking away with another, putting through a rise in fuel duty at the same time.
Unfortunately, beyond the immediate tax relief there is a mass of bad news and utterly disingenuous statements in the Chancellor's speech.
“But a crisis which began, as America itself has said, in the US housing market has seen these benign conditions undermined.”
This statement is akin to the Kaiser standing before the pearly gates and blaming the First World War on Serbian nationalism. While it might have had little to do with what triggered the crisis, the Government is deeply implicated in the various policy and regulatory weaknesses that meant a fall in the value of some houses in the United States led to the greatest financial crisis to hit the United Kingdom in well over a century.
At the TaxPayers’ Alliance, we released a major report (PDF) over the weekend on the causes of the financial crisis. We set out how policy choices – particularly around interest rates – drove the build-up of the crisis; how regulators failed to respond effectively and how international regulations exacerbated the crisis once it got underway. The Government’s unending attempts to try and pretend the present crisis is some kind of exogenous bolt from the blue striking their well laid plans are utterly misleading.
“That’s why my Pre-Budget Report today represents a substantial fiscal loosening – to help the economy now – with a £20bn fiscal stimulus between now and April 2010, around one per cent of GDP.”
Unfortunately for the prospects of a fiscal stimulus proving effective, ordinary people are already quite heavily indebted, nearly £60,000 on average per household including mortgages. If they think that these cuts will be clawed back in tax rises in the years to come they may well decide that it is safer to pocket the savings. Financing the huge deficits that are being run up is also likely to become steadily more expensive and risky. Ruth Lea has described some of the risks already on this blog.
“As a result of the combined effect of lower revenues, our commitment to maintain spending and extra support to the economy, borrowing will rise to £78bn this year and £118bn next, or 8.0 per cent of GDP.
But then, from 2010, as I take action to reduce borrowing when the economy begins to recover, borrowing will fall to £105bn, £87bn, £70bn and £54bn.
And by 2015/16, we will again be borrowing only to invest.”
Allowing official debt to rise to £1 trillion, with total liabilities including PFI debts and public sector pension liabilities still much higher, mortgages Britain’s future to an alarming degree. Things may turn out significantly worse than that, already alarming, projection though. The economic forecasts that underlie Alistair Darling’s account of future borrowing are optimistic. He is relying on making substantial savings in public spending without any plan to seriously trim the bureaucracy, scrap useless organisations or place strict controls on spending by departments.
The reason why we’re facing such unsustainable deficits is that we entered the crisis with structural deficits in the public finances. After long years of growth we were already borrowing significant amounts. These deficits were built by big increases in spending, at around £30 billion a year for some time. If spending keeps growing at around £30 billion every year then no package of taxes will make that sustainable.
On the other hand, if that growth can be slowed markedly – and significant upfront savings found – then it will be possible to restore the public finances to health more quickly and ease the burden on families and businesses. That will require scrapping Government bodies that achieve little, like the Regional Development Agencies, and ending the culture of spending = results that pervades the Government's thinking, and was confirmed in the budget speech. That way you can start to change how the public sector does things and deliver genuinely better value.
“So again from April 2011, I intend, only on income over £150,000, to introduce a new rate of income tax of 45 per cent.”
[...]
“I propose, therefore, from April 2011 to increase by half a percent all rates of National Insurance Contributions, for both employees and employers.”
The last thing the economy needs is for the Government’s to make employing people more expensive or impose a new income tax hike on high earners. Right now economies around the world are contracting but, in time, a recovery will arrive. Nations will build prosperity or poverty for decades to come on the basis of whether they signal that they will be a low tax, business friendly environment or a high tax domicile where politicians are out to bash the rich. After the needless attack on non-doms and with the increasing aggressiveness of HMRC, Britain is being set up desperately poorly for the vital competition to be the most attractive destination for investment in the recovery. As Allister Heath noted this morning in City AM (not online) this will leave Britain with the joint highest top rate of tax in the G20.
The Government will gain little revenue in return for imposing the new top rate. Even static estimates suggest it will raise around £1.2 billion. The Centre for Economics and Business Research are more sceptical and suggest it may lead to a fall in revenue over time. Either way, the main effect will be symbolic, the Government clearly prefers ‘bash the rich’ grandstanding to attracting investors to Britain. The increase in national insurance will raise more but will hit every Briton and is effectively an increase in income tax.
Just a few decades ago, Britain was falling behind its peers and understood as the Sick Man of Europe. Ending that pattern of decline wasn’t easy. More recently, Goldman Sachs predicted that Britain was on the path to become the richest major economy in the world, per capita. Thanks to this dreadful budget and a decade of big spending, small results government – documented in our recent report Gordon Brown’s Economic Failure (PDF) - we are in danger of becoming the Sick Man once again.
