By Dr Steve McCabe , Birmingham City Business School
The Budget speech delivered by Chancellor George Osborne tells us much about his desire to ensure that issues of the economy are driven by political dogma rather than what is necessarily good for the economy. Osborne is, of course, not exceptional to every other Chancellor of the Exchequer all of whom wish to use this event to support their own political party and, to a greater or lesser extent, their own ambitions.
That Osborne persists in his belief that it is the long-term that is important is to be expected. However, he chooses policies and initiatives that are purposely intended to achieve short-term fixes. That this budget has dodged some difficult issues such as pension reform is well known. George did not want to cause undue annoyance among the aspirant middle classes who might be negatively affected and be tempted to vent their feelings by voting to leave the EU. The rise in the annual ISA limit to £20,000 from £15,000 as well as the “lifetime” ISA for the under-40s in which the government contributes £1 for every £4 saved feels like tinkering and can no way be regarded as radical.
Osborne claims that further cuts in the budget are essential to secure long-term prosperity for all. However, his intention to make further cuts in government expenditure of about £4 billion by the end of the parliament will, as well as hitting the most vulnerable hardest, be likely to undermine further growth.
We are told that the economy is growing. The problem is that any growth is largely based on consumer spending; certainly not what rebalancing the economy was supposed to be about. But there are storm clouds ahead and it seems that in the space of only four months the economy is in fact £18 billion smaller than when the Office for Budget Responsibility (OBR), which is independent from government, last reported in early December as part of the Autumn statement.
Moreover growth is predicted to rise even more slowly over coming years, which will mean lower tax receipts and, it must be assumed, higher government spending – unless we see some really savage cuts; hardly likely to do George’s popularity any good (particularly as he hopes to be moving into 10 Downing Street once the present incumbent moves out).
Osborne was committed to cutting debt as a proportion of the country’s GDP this year. According to the OBR this won’t happen until 2017-2018 at the earliest; if we believe forecasts which have been notoriously inaccurate in the past. Another question that needs to be asked is how Osborne can make a statement in which this country will be borrowing almost £40 billion in 2018 but by 2020 whoever is chancellor then will have in excess of £14 billion in surplus? That’s an amazing turnaround, even for someone who has consistently missed all of the targets he has set since becoming chancellor in 2010.
We can expect much attention to be focused on the alterations to taxes in that the tax-free personal allowance is due to rise to £11,500 and the threshold at which 40% tax is paid to increase to £45,000 next April. However, this feels like small beer in the bigger scheme of things and it’s notable that beer and spirits won’t rise.
What is to be welcomed is the so called ‘sugar tax’ as well as the increased spending on capital projects including new rail lines, ‘Crossrail 2’ in London, a high speed link between Manchester and Leeds as well as £230 million for road improvements in the north of England and £700 million for flood defences schemes. However, this is hardly going to kick-start a revolution that will ensure a rapid increase in living standards that will restore the vast majority of the population to where they were before the Global Financial Crisis in 2008.
Perhaps George hopes that the changes made in corporation tax which is due to fall to 17 per cent by 2020 as well as the threshold business tax relief on small business to rise from £6,000 to a maximum of £15,000 will create a more dynamic and vibrant economy. His proclamation of increased effort to clamp down on tax avoidance which will raise an additional £12 billion by 2020 is welcome but many will argue not before time.
The next couple of years are going to be tough. The portents from China, for example, are not good. If the vote on 23 June is to leave the EU, there will be even greater uncertainty. Who knows, David Cameron may resign and George will have a straight fight with Boris? This is all speculation. What can be said is that this budget represents a fudge, in that it needed to appeal to as many possible without upsetting too many who might take their anger out on Cameron and Osborne in the EU referendum in June.
Once the dust has settled on that with all the potential attendant consequences we will probably then see the really nasty measures if the projected surplus by 2020 is to be achieved. Whether George Osborne continues as chancellor remains to be seen. It begs that question as to who would serve under Boris as chancellor. What I do suspect, similar to the title of the 1974 single by Bachman Turner Overdrive, is that we ain’t seen nothing yet!
Dr Steve McCabe
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