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Budget: A wimpish disappointment
Jun. 22nd, 2010 02:49 pmIf only David Laws was still around. I look at the numbers. They don't seem to me to add up to anywhere approaching the required savings. So I look at the supplement at the Treasury site
http://www.hm-treasury.gov.uk/d/junebudget_notes.pdf
but all that I can see there is a rise in Insurance Premium Tax -- no other hidden gems that will raise £2bn without anyone noticing.
The FT will have time by tomorrow morning to make estimates of likely savings and whether it will be enough, but my gut feeling is that it isn't enough, not by a long shot.
A 5% mini-VAT on basics would have been my favourite. Call it an "emergency measure", even though we all know that income tax was an emergency measure when first introduced, while pensions were just meant to be for a small section of society. If pensions were offered today at the same age (compared with life expectancy) as when they were introduced, people would begin collecting them at the age of 95.
Just in case we forget the real numbers -- the numbers which Osborne claims will be eliminated by the end of this parliament:
The UK had a general government deficit of £159bn last year, or 11.4% of GDP. Now, when you consider that in a few areas the budget actually gives more money away the only way that I can see this number being meaningfully reduced (let alone eliminated, which is the stated aim), is to get economic growth way over and above that which I expect to happen.
This is, in other words, a budget whose success depends, implicitly, on other countries' budgets failing, because we need them to buy our stuff, while we do not buy theirs. We need our economy to grow without our consumption growing.
But we know that other countries are also following this path. Is the hope that China will suddenly become a consuming powerhouse? That the USA will become the consumer of last resort? This is fantasy-land stuff.
Now, "fortunately", there's some extra money that's going to be taken out of our pockets without the government directly accepting the blame. The levy on banks will surely hasten the end to free credit cards and free banking. Other things which were "free" will perhaps begin to become more expensive. And the hope is that, although unemployment has to come down (to boost government income), it can't come down in a way that increases wage inflation. This, too, is somewhat fantasy economics. If the economy has to grow and more people have to be in work, generating tax income for the government, then more upward pressure will occur in the wages sector. Indeed, it looks to me that this could (if the Treasury's predictions are right), lead to supply-driven and demand-driven inflation.
But the Treasury's numbers aren't right. A quick look at this pdf:
http://www.hm-treasury.gov.uk/d/junebudget_notes.pdf
and a glance at chart 1.4 (House price/earnings ratio) and chart 1.8 (output per worker) seem to me to imply a benign assumption in lack of volatility that history shows to be verging on the extremely improbable.
Put simply, you don't have to say that the assumptions are wrong on the upsode or on the downside. You just have to say that historical trends show them to be likely to be wrong one way or the other -- which in turn would imply a likelihood of an undershoot into low-inflation/recession or an overshoot into economic recovery/inflation.
Then again, inflation is, of course, something that this government wouldn't really mind. Even if you adjust stuff up annually each year to match inflation, the movement in prices within the year can be a nice little earner. If, for example, prices go up by 10% from Jan to Dec, and you adjust allowances upwards by 10% the following April, then you the government will have had 14 months divided by 2 worth of benefit (i.e., 7%). The only danger is losing the triple A rating. But since inflation paradoxically makes it less likely that the government will default on older, low interest bonds, I don't see why increases in inflation should be seen as a threat to credit-worthiness.
So, all in all, this is a disappointment. This was perhaps the one chance to really smack in a "wartime" budget that might have got the UK back on track to a balanced structural current account. The only solution now is the old one of the seventies -- inflate away the deficit.
_________
http://www.hm-treasury.gov.uk/d/junebudget_notes.pdf
but all that I can see there is a rise in Insurance Premium Tax -- no other hidden gems that will raise £2bn without anyone noticing.
The FT will have time by tomorrow morning to make estimates of likely savings and whether it will be enough, but my gut feeling is that it isn't enough, not by a long shot.
A 5% mini-VAT on basics would have been my favourite. Call it an "emergency measure", even though we all know that income tax was an emergency measure when first introduced, while pensions were just meant to be for a small section of society. If pensions were offered today at the same age (compared with life expectancy) as when they were introduced, people would begin collecting them at the age of 95.
Just in case we forget the real numbers -- the numbers which Osborne claims will be eliminated by the end of this parliament:
The UK had a general government deficit of £159bn last year, or 11.4% of GDP. Now, when you consider that in a few areas the budget actually gives more money away the only way that I can see this number being meaningfully reduced (let alone eliminated, which is the stated aim), is to get economic growth way over and above that which I expect to happen.
This is, in other words, a budget whose success depends, implicitly, on other countries' budgets failing, because we need them to buy our stuff, while we do not buy theirs. We need our economy to grow without our consumption growing.
But we know that other countries are also following this path. Is the hope that China will suddenly become a consuming powerhouse? That the USA will become the consumer of last resort? This is fantasy-land stuff.
Now, "fortunately", there's some extra money that's going to be taken out of our pockets without the government directly accepting the blame. The levy on banks will surely hasten the end to free credit cards and free banking. Other things which were "free" will perhaps begin to become more expensive. And the hope is that, although unemployment has to come down (to boost government income), it can't come down in a way that increases wage inflation. This, too, is somewhat fantasy economics. If the economy has to grow and more people have to be in work, generating tax income for the government, then more upward pressure will occur in the wages sector. Indeed, it looks to me that this could (if the Treasury's predictions are right), lead to supply-driven and demand-driven inflation.
But the Treasury's numbers aren't right. A quick look at this pdf:
http://www.hm-treasury.gov.uk/d/junebudget_notes.pdf
and a glance at chart 1.4 (House price/earnings ratio) and chart 1.8 (output per worker) seem to me to imply a benign assumption in lack of volatility that history shows to be verging on the extremely improbable.
Put simply, you don't have to say that the assumptions are wrong on the upsode or on the downside. You just have to say that historical trends show them to be likely to be wrong one way or the other -- which in turn would imply a likelihood of an undershoot into low-inflation/recession or an overshoot into economic recovery/inflation.
Then again, inflation is, of course, something that this government wouldn't really mind. Even if you adjust stuff up annually each year to match inflation, the movement in prices within the year can be a nice little earner. If, for example, prices go up by 10% from Jan to Dec, and you adjust allowances upwards by 10% the following April, then you the government will have had 14 months divided by 2 worth of benefit (i.e., 7%). The only danger is losing the triple A rating. But since inflation paradoxically makes it less likely that the government will default on older, low interest bonds, I don't see why increases in inflation should be seen as a threat to credit-worthiness.
So, all in all, this is a disappointment. This was perhaps the one chance to really smack in a "wartime" budget that might have got the UK back on track to a balanced structural current account. The only solution now is the old one of the seventies -- inflate away the deficit.
_________
