Professor David Bailey, of Coventry University Business School, gives his views on the Budget.
George Osborne is a gambler. Two years ago he took rolled the economic dice by setting out to eliminate the structural deficit by the end of this parliament.
But with flatlining growth, Osborne has since had to borrow more than he planned and to extend the deficit reduction programme into the next parliament. Nevertheless, the Government still seems to be winning the public debate and Labour has yet to land a serious blow, on the economy at least.
Now Osborne has taken another gamble, this time a political one, by cutting the 50p top rate on earnings over £150,000 a year to 45p, attracting fire that this was a budget for “the millionaires rather than the millions”.
The gamble is that this damages the carefully constructed narrative that “we’re all in it together”’ which has been a key element of the Government’s carefully presented cover for a severe austerity package.
Osborne defended his move in two ways. Firstly, he pointed to a range of new measures targeted at the rich, such as a cap on the tax allowances top earners can claim and a seven stamp duty rate for properties worth over £2 million.
Secondly, the Chancellor kept the Lib Dems on board by raising the personal allowance threshold to £9,205, taking it closer to the coalition goal of a £10,000 allowance, in so doing claiming that he was many people out of tax completely.
Add in cuts in corporation tax cuts and overall this can been seen as a highly significant and carefully crafted package of measures which politically aim to ensure support for some pretty big concessions to the well-off and business by offering help to those on lower incomes through the raising of the personal allowance.
Nevertheless, a gamble it remains.
The big tax cuts by Nigel Lawson in the late 1980s took place when the economy was growing, incomes rising, house prices were rocketing, and people were confident.
This is a different world; the Office for Budget Responsibility suggests little improvement in the economy, with the latter growing at just 0.8 per cent this year (revised marginally upwards) and still vulnerable to another round of eurozone crisis or an oil price spike. Anemic growth means rising unemployment and a youth unemployment crisis.
And with the biggest squeeze on real incomes since the 1920s, one wonders how people experiencing another year of falling real incomes will react to a perceived cut in tax for the rich.
But what surprised me the most was the £5 billion raid on pensioners and the unveiling of another £10 billion of welfare cuts.
On pensions in particular, some 4.4 million pensioners will be worse off next year as a result of changes to age-related tax allowances. Osborne must hope that his raft of supply-side reforms, ranging from dramatically simplified planning regulations through to new funding for ultra-fast broadband and support for the video games sector will help boost growth.
After all, leaders of big businesses got what they wanted – a cut in the top rate of tax and a cut in corporation tax. The chancellor will be hoping that they will reward him by starting to invest some of their huge cash piles and getting the economy going.
But there’s the rub. The real problem that the UK economy faces is a lack of demand, and on that the Chancellor did nothing. As I’ve argued here before, the Government could have addressed this through a fiscal loosening which is “temporary, targeted and timely” (as several commentators put it), such as a temporary reduction in national insurance contributions for employers to boost the demand for labour. Instead, the Chancellor has stuck firmly to Plan A.
There were, of course, some welcome moves.
Osborne was right to see business investment as major ongoing issue given the failings of the banking system, and the combination of a reduction in corporation tax and the National Loan Guarantee Scheme are meant to provide a boost here.
Whilst welcome, the latter seems a poor second best to the creation of a genuine small business investment bank (recrafted out of RBS perhaps) that could channel funds to small firms and provide some competition to the big banks. This was a missed opportunity to help small firms.
So, overall, how should we view the budget? In economic terms I doubt it will have much impact in two key senses. Firstly, I’m sceptical in terms of its impact on growth.
So far, the Government’s growth record has been dismal and the economy remains four per cent smaller than it was before the recession began in 2008. Before the budget, official forecasts saw it taking until 2014 to get back to pre-recession levels, a period longer than the 1930s depression.
The budget will make little difference to this.
Secondly, on reducing the deficit, Osborne has already had to accept that weak growth and lower tax receipts will push the deficit reduction plan well into the next parliament.
The Office for Budget Responsibility now predicts that there will have to be a further £10 billion of cuts in welfare spending.
That’s on top of the £18 billion that Iain Duncan Smith has had to find already – the bulk of which have yet to even bite.
So Osborne has rolled the dice again.
He must now hope that the rich and the big businesses he has favoured start investing and get the economy moving and in so doing create more jobs.
Let’s hope that they do – both for his sake and for the many young people now unemployed.
*Prof David Bailey's blog for the Birmingham Post can be found at blogs.birminghampost.net/business/david_bailey