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?