Did the budget meet my tests?

A brief note, reflecting on the criteria by which I proposed we should judge the budget, now it has sunk in:

  • What is the timescale? 5 years, so this is a clear Conservative victory. I am deeply concerned about this, possibly more than anything else, because I think it will damage growth over the next half decade (possibly plunging us back into recession) and thus prolong, not minimise, the pain.
  • What is the proportion of cuts to tax rises? I hear differing figures, but I think the most accurate figure is 77% cuts to 23% tax rises. That is a slight reduction on the Tories’ 80:20, but is closer to that than the Lib Dem figure of 71:29 (or 2.5:1 depending on how you want to look at it). Of course, converting it all to percentages highlights quite how close all three parties plans were (Labour were committed to 67:33). To an extent therefore, I will concede that much of the battle had already been lost before the election. But there are tax rises and then there are tax rises. Which brings me to…
  • What kind of tax rises? Leaving aside the Capital Gains Tax tweak, which only raises £1 bn (half the amount to be raised in the Lib Dem plan), the main hit is on VAT, both the higher and lower rates, to 20% and 6% respectively. There is no escaping from the fact that this is a total defeat for the Lib Dems in coalition. There are no new wealth taxes, despite the fact that large amounts of uneconomically productive wealth is locked up in land across the country, which in turn ensures that rent rises are artificially high (a problem exacerbated by the Housing Benefit cap) and contributes to the housing shortage. The Social Liberal Forum can point to one small victory however: the increase in personal allowance will not be passed onto people paying the higher rate of tax, something which we argued for at both the special conference and in our letter to Nick Clegg and Danny Alexander.
  • Will it be egalitarian? Despite the government’s protestations, the broad consensus is that the overall package will lead to greater inequality, not less. Indeed, the debacle over whether the package is fair on the poor or not has made our case superbly about the need for the Office of Budget Responsibility to be both genuinely independent (ideally appointed by parliament directly) and have inequality written into its terms of reference. If it had been, I genuinely believe that it would have lead to a fairer budget: George Osborne to his credit understands the need for transparency in fiscal policy and has taken great strides to improve this. Ensuring that they can’t spin about inequality is a very crucial part of the jigsaw puzzle.
  • Will we end up with more or less means testing? Superficially, this is a victory as the scope of means testing was not increased. With that said, the number of people facing marginal rates of tax of around 90% actually increased – despite David Cameron’s highflown rhetoric about ending this last year. If proof were ever needed of how a smaller state can lead to less freedom, this is it.
  • Will this budget lead to a fairer, greener economy? The short answer to this is: wait and see. There was very little in the budget to give us hope on this score, apart from the commitment not to cut any further capital spend. We must now look to the Spending Review to see whether all this pain will lead for a more sustainable, brighter future. Much of what is in the coalition agreement is hopeful on this score, and much of it will be lead primarily by Liberal Democrat Cabinet members: Vince Cable and Chris Huhne. But it involves convincing the Treasury that these plans are worth proper investment, and sadly the Treasury have not exactly filled me with confidence this week.
  • What will be in the budget to prevent a “double dip” recession? Again, we will have to wait and see on this score. The commitment to capital investment was at least something, as was the very small amount of help to entrepreneurs. But to suggest that taking such a large amount of money out of the economy during such a short timescale will have no impact on the recovery, is fantasy economics. Osborne and Alexander are taking a big gamble here. Only one thing is clear: if we do go back into recession, it will be very clear who is to blame.

Overall, then, I’m not convinced this is a good budget, or even a necessary one. If I were a Lib Dem MP would I oppose it? I would certainly be thinking very hard about how I might be able to improve it via the Finance Bill.

But where do we go from here: any thoughts?

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9 comments on “Did the budget meet my tests?
  1. james says:

    The extent of the cuts if implemented go further than is necessary to reduce the structural deficit – I expect the rationale for this will be standard neoliberal arguments.

    Lib Dem MPs would be wise to oppose a Tory measure not mentioned – the reduction of tax incentives for firms to invest in new plant and machinery. This is being done to allow a cut in corporation tax, something which benefits firms regardless of whether they are exporters. This seems a little odd given that economic revival is supposed to emerge from export-led growth.

  2. Mark Yeates says:

    I am not convinced by this budget at all. The more you look into the minutiae of it, the more you can see the underlying monetarist/neo-liberal ideology at work. The increase in VAT is particularly worrying, what have yet to see mentioned in forums is the rise from 5% to 6% in the lower band – you’re electric and gas supplies. with costs still unpredictable and many already on the poverty line young, old or middle aged, this added burden is going to hit some families hard.

    You also have to consider that many of these families or elder people will live in some form of social housing or privately rented accommodation, which the landlord will insist on having a key or card meter, to pre pay your energy costs. these are usually much more expensive than normal meters.

    The pay freezes are as was admitted by Cameron yesterday in effect pay cuts in the public service; I know we all need to ‘cut our cloth’ so to speak, but the cut off point of 20K, is hardly an above average wage these days. Add to that the reduction on child benefit and tax credits, who exactly is taking the ‘HIT’ here?

    We again have the DWP using the disabled and weak as the scapegoats. Another reform on DLA and Incapacity (as it is I have two 50 page books to fill in each year and usually a medical assessment every 24 months. the rules get tightened every year, sorry but my hearing, eyesight, diabetes and depression don’t improve over time, they get worse (hey ho!!!). The forcing single parents of school aged children to seek work (if there is any work to find).

    Corporation Tax reduced by 4% to 24% ( as James say, this is regardless of the benefits to the economy the businesses are). the bank levy is in itself farcical article 2.78 on page 50 of the budget it states ‘…the levy will be st at a rate of 0.07 % (jan 2011), with a lower rate of 0.04% 2011- 2011-12 ;which according to table 2.1 page 40 of the budget report yeids the following
    * 2011-12 +1,150 m
    * 2012-13 +2,320 m
    * 2013-14 +2,500 m
    * 2014-15 +2,400 m

    So, the blighters whose mess this mostly belongs to get off with barely a slapped wrist and a message of carry on as usual, whilst the weak, old and below average in pay take the brunt of the cuts in benefits and increases in taxation. Seems fair if you’re a Telegraph reader I guess.

    With this and a broad 25% cut in all departments except Health and Oversea Aid, where exactly do we as Lib Dems stand? How can the ordinary member get their voice heard? I was vocal against this coalition to begin with I am not convinced by the budget that I was wrong in my initial assessment.

    The ONLY thing that I can hold onto is that this is not a Liberal Democrat Budget, but a coalition one.

  3. Foregone Conclusion says:

    Mark,

    I don’t think that the lower rate of VAT has gone up. I keep seeing this everywhere, but the budget document clearly states:

    “This Budget makes no changes to the VAT zero rating for household essentials, nor to the reduced rate of VAT.” (p. 18)

    What HAS gone up from 5% to 6% is the Insurance Premium Tax lower rate, which was previously identical to VAT.

    Apart from that, I pretty much agree with your assessment of the budget.

  4. SB says:

    I missed that as well, fuel will increase from 5% to 6% in January 2011
    http://money.uk.msn.com/emergency-budget-2010/articles.aspx?cp-documentid=153886765

  5. Mark Yeates says:

    I appear to have got that wrong about 5-6% in reduced VAT. But there are conflicting reports:

    “the standard rate of Value Added Tax (VAT) will increase from
    17.5 per cent to 20 per cent from 4 January 2011. VAT is a
    sustainable source of revenue and is less distortionary than other major tax
    bases. The incresase will raise £13.5 billion a year, on a scorecard basis, by
    2014-15. Following this increase, the main rate of VAT will remain below
    the European Union average. This Budget makes no changes to the VAT
    zero rating for household essentials, nor to the reduced rate of VAT; and…”

    1.44 page 25 of budget report http://hm-treasury.gov.uk/d/junebudget_complete.pdf

    but as above msn have it as an increase. Then on This Is Money

    “What is the UK’s current VAT rate?

    There are three different VAT rates that exist within the UK. The first is the standard rate which is currently at 17.5%; the second is the reduced rate which is 5% and the third is the zero rate.

    From 4 January 2011, rates will be 20%, 5% and 0%, respectively.”

    Read more: http://www.thisismoney.co.uk/tax/article.html?in_article_id=506807&in_page_id=11&position=moretopstories#ixzz0rmPgJdWU

    That however doesn’t detract from the main argument of the article. Thanks toForgone Conclusion for the tip off. But as for being clear, this budget is clouded in as much fog, smoke and mirrors as all previous budgets, and I nearly gave up the will to live after page 35……..

  6. Terry Gilbert says:

    HM R&C say no rise in the lower rate here:
    http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-increase.htm

    The budget is bad enough, without undermining our argument by getting the facts wrong.

  7. Alex says:

    “What will be in the budget to prevent a “double dip” recession? Again, we will have to wait and see on this score.”

    Well, I’ve seen Vince Cable in Parliament and Danny Alexander on the BBC both be asked if there’s a plan B, and both did the usual politicians thing of not answering the question, which tells me that there is no plan B. That was what really nailed it for me, that liberals should vote this budget down.

    Personally I feel we should have more fiscal stimulus. However, not even the Liberal Democrats were arguing that in the election, and I was broadly in favour of what I read in the coalition deal in total. I don’t agree that we have to start reducing the deficit now, but I accept this as a compromise (and 30% of me thinks it might be right economically). However, once you give the Tories the deficit, it absolutely has to be a red line that the budget isn’t regressive. But it was. And that’s just based on tax and benefits changes, never mind cuts in the vast majority of departments of 25% which is obscene.

    To top it all off is the fact the reduction will be done over a single Parliament, which is faster than even the Tories wanted in the election.

    Then you get the defences of this. It was all “unavoidable”. Because we might end up like Greece or something. The Tories have had that line for over a year, then suddenly Vince Cable buys it right around the time he was forming a coalition deal. Because Mervyn King advised him and he changed his mind? King has been advocating spending cuts for months now (he shouldn’t be talking about fiscal policy anyway, he’s supposed to be independent), so that defence doesn’t add up. The simple fact of the matter is that economically, nothing changed for Britain when Greece and the eurozone were all in the headlines the other month. They’ve been in trouble for a while now, and I’m certain he knows this. Nothing changed for the UK – gilt yields are still low.

    This wasn’t unavoidable. It could’ve been fairer. But instead of admitting this, we get fobbed off with secret Treasury models that supposedly show 28% as the rate for CGT which raises the most money. Why then does Nigel Lawson disagree? Why not reintroduce inflation indexation on those gains if they wanted to make the raise fairer? Why tell us that it’s impossible to hit higher earners more, even though there are perfectly viable tax raising measures in the Lib Dem manifesto? Sure, Tory backbenchers might not vote for a mansion tax, but at least be honest. Don’t tell us the budget’s measures were all somehow unavoidable when the real story is the Tories didn’t want to make it fairer.

    This budget seems to make not jut swinging cuts in our economic future, but also the party’s Keynesian and Beveridgian traditions. I’m not sure I can vote for the Lib Dems after this (I am not a member). I voted for them in May. I can’t vote Labour, as they’re too authoritarian. I may end up voting Green (even if they don’t necessarily tend to think like liberals often).

  8. Mary says:

    The budget is clearly not fair, and we are clearly not “in it all together” There were/are alternatives, see UNISONs alternative budget. One of the measures in the alternative budget is a Robin Hood Tax, which before the election many Lib-dems were positive about and a high proportion signed an EDM supporting the tax. The government dont seem interested in solutions which have got to lead you to believe this is an ideological budget, with no care to the harm it will cause to many. What happened to Lib-Dem support to solutions that dont hurt the majority?

  9. Stephen Mcconnell says:

    Perhaps a little bit simplistic and no doubt an administrative pain in the neck but my idea would be a splitting of the top rate of VAT so that the more essential non essentials e.g. white goods, utilities etc are raised to a less onerous 18.5% but the truly luxury items e.g. Ipods, play stations, flat screen tv’s etc attract a rate of 22.5% (yes I know that that is actually 3.5% cumulatively but I doubt that just raising luxury good vat 5% without any increase to more essentials vat would raise the same as the current 20% for everything plan).

    I this way people on low incomes would only be hit by the increase on truly non essential items rather than 20% on things like kitchen goods, phone bills etc.

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