The UK budget judgement

The surprises in the budget were the big increase in VAT for next year, and the decision to continue with large cash increases in total public spending over the five year period. The Chancellor, who had said that 80/20 was the right balance for spending cuts and tax increases, settled instead for a 57/43 balance in 2011-12 and for 64/36 the following year. His spending totals are:

2009-10 (Last Labour year) £669bn
2010-11 £697bn
2011-12 £700bn
2012-13 £711bn
2013-14 £722bn
2014-15 £737bn (£68bn or 10% above Labour level)

It is true that the substantial cash increases in total public spending still require cuts in some areas. Debt interest, overseas aid and EU contributions, especially the first of these, make up a substantial increase in spending on their own. Labour decided to cut capital investment by around 40% which remains the plan in this budget. If welfare bills do not come down, and if public sector inflation remains a problem then the cuts in other programmes will have to be bigger. If the wage and pensions bill can be held down and the welfare bill brought under control the pressures on the rest of public spending will be reduced. We should place greater reliance on the next two year’s forecasts and less on the subsequent years, as plans will be subject to revision depending on economic recovery, inflation and other variables.

I pointed out in the Budget debate that success for this strategy would depend on assisting a stronger private sector led recovery. Welfare bills will come down faster if more jobs are created. Revenues will be rebuilt more quickly if the private sector grows faster. This will require a new approach to banking regulation to frree the banks to lend more to credit worthy businesses, and a new approach to monetary policy which has allowed easy credit and money creation in the public sector to the exclusion of much else.

It will also require more regulations to be removed from the Statute book to cut business costs. The reduction in the headline rate of Corporation Tax to 24% over the next few years is a welcome move towards restoring greater tax competitiveness, and the cuts in National Insurance will help.

I would like the government to prove Dr Budd wrong. He has forecast from the OBR that the budget will lower Uk growth by 0.1% in the first year and 0.3% in the second year. To prove him wrong the government needs to do more to assist enterprise Britain.

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35 Comments

  1. Mike Stallard
    Posted June 23, 2010 at 5:34 am | Permalink

    Down the gym I heard this remark: "You know, when you are working in Dubai, you take home your whole salary, so if you earn £75,000 per year, that is what you get. Here, you lose 40%."
    Jeremy Kyle: "Why should I pay for your drug habit?"

    Until we realise the biting truth of both these remarks, we are going to get nowhere.

  2. Robert
    Posted June 23, 2010 at 6:56 am | Permalink

    As I have blogged here before, the state needs to remove the barriers it has created that impede the evolution of an enterprise economy. On the one hand it is good that Mr Osborne has flagged policies to reduce the deficit. Reducing corporation tax is also welcome. On the other, retaining an upper rate of income tax that is amongst the highest in the world and increasing CGT will impede the ability of the private sector to pick up the growth baton from the borrow-and-spend public sector. The data you present showing how public spending is actually still set to increase over the next five years, which I haven't seen anywhere else this morning, illustrates that the balance between state and citizen remains out of kilter.

  3. Norman
    Posted June 23, 2010 at 7:28 am | Permalink

    Not quite sure what that table and the term 'cash terms' means. I can't believe that government spending is going to increase by 10% over the next five years at the same time we are raising taxes. That would be absolute madness considering the position we are in.

    I'd be interested to konw what is happening to total government public spending as a percentage of GDP. The Chancellor should be aiming to get this rocketing down and cutting taxes at an equally fast rate to stimulate growth and increase revenue. The era of big government has to end.

    For someone who seems to break promises regarding right of centre policies with hardly a moment's thought I wish the PM would reconsider the NHS and International Aid budgets. There's just been a spin campaign for a whole month disingenuously telling us 'It's worse than we thought' they could have used that as the excuse but instead a VAT rise (that will never be reversed) and other tax increases are seen as more palatable.

    Reply: Public spending rises by 10% – but if there is inflation then that eats into the extra 10% cash voted for the spending.

    • Acorn
      Posted June 23, 2010 at 12:06 pm | Permalink

      Norman, it is smoke and mirrors as usual. As I read it so far, in today's money -2010/11 – spending drops by about 1% a year for five years in real terms (not cash terms, which goes up, as above). While tax yields rise by about 3.5% a year. With the assumption that headline GDP grows by about average 2.3% a year over five years.

      When indirect taxes go up, VAT in this case, The "headline" market price GDP goes up. The government spending percentage of GDP goes down. Basic price GVA or factor cost GDP give you a more honest indication of the economy.

  4. lola
    Posted June 23, 2010 at 7:47 am | Permalink

    Yep. The coalition needs to learn 'public spending bad, private spending good' mantra. And in double quick time.

  5. Quietzapple
    Posted June 23, 2010 at 8:37 am | Permalink

    It is an "Egotist" budget, not an "Emergency" budget.

    Orborne's newly created OBR indicates that it will increase inflation, reduce growth, and increase unemployment at just the wrong time.

    While I hope it will not be enough to tip the UK economy into a second recession because manufacturing was rising at a rate higher than at any time since 1994 and other sectors are soldiering on, it has seemed that the "Coaition" is denied the confidence of a majority of the population.

    While most wish to support cuts in public expenditure, far fewer have confidence in the way HMG are going about their business.

    A little wisdom at least, it seems ….

  6. waramess
    Posted June 23, 2010 at 8:53 am | Permalink

    This must be the most distressing budget ever.

    Apart from the damage to the economy caused by the tax increases: if Government stops spending and Joe public is further constrained from spending who is going to be ready to manage the recession that will inevitably follow?

    Not one penny of the 25 percent cuts to government departments properly detailed. How on earth do they think they will be able to deliver this?

    Cutting departmental budgets will lead to civil servants cutting the most politically sensitive projects and cuts to headcount will simply result in more temporary workers. The only way is to cut entire departments or, as did Margaret Thatcher, resort to privatisations. How about starting with the NHS?

    And then, on top of all the nonsense I hear the hope for growth is in exports; an activity that currently boasts 13 percent of our GDP is expected to suddenly rise up and save us from recession.

    A recession is what we will get but the distress is that our politicians will not be planning for it. For certain it would have been better for us to have lost the last election and left the socialists to wallow in the mess

    • Acorn
      Posted June 23, 2010 at 4:34 pm | Permalink

      I don't want to add to your misery; but, I will 😉 . You and I will be interested to see the detail of the "public sector pay freeze". You may be aware that the PS has two pay rises a year. The increase in the pay "scale" and progression up that pay scale in "increments" each year. Also, if someone gets promoted or their post is "job evaluated" the former will get at least one increment; the latter, none to several increments. (These latter tricks were used last time we had a freeze.)

      So a freeze means we can shut down all national pay review quangos for a couple of years at least. Mind you, national bodies do stop individual Mickey Mouse councils getting mugged by Trade Unions.

      NB for JR. Did you speak at IEA today; anything to report?

      Reply: Yes, I spoke briefly along the lines of my speech yesterday to Parliament and the comment on this site.

      • Alan Jutson
        Posted June 23, 2010 at 8:25 pm | Permalink

        Acorn

        Your comment about two pay rises a year is absolutely correct, until you get to the top of your particular pay scale.

        Has anyone seen the date from when these pay freezes start ?

        • StevenL
          Posted June 24, 2010 at 12:49 pm | Permalink

          Going up increments happens at the start of the financial year (April) at the same as any pay rises happen.

          He does have a point here – according to the media I got a 1% pay rise last year. According to my payslip I got 3.96%!

          The pay freezes mean that there will be no across the board percentage increase applied to all the numbers on the payscale in April 2011.

          • Alan Jutson
            Posted June 24, 2010 at 7:51 pm | Permalink

            Steven not all pay rises happen at the start of the year April.

            Wage scale (cost of living) rises happen usually in April, then scale increments (skill or time served) can happen at any other time, we have a family member who works for the NHS.

  7. amedin
    Posted June 23, 2010 at 11:36 am | Permalink

    John

    Where do you get information from to say 2014/15 figure is 10% above Labour?

    I'm just looking at the March budget and they planned to spend £772m (£725m gross expenditure + £47m gross investment).

    I'm sure you're correct, I'm just interested to know

    Reply: It's 10%above Labour's spend in 2009-10

  8. Lucy Parfait
    Posted June 23, 2010 at 11:53 am | Permalink

    A disappointing budget focusing on too much on tax increases and far too little on cuts. The NHS should have faced large cuts, Europe should have had their payoffs reduced, wars ended and quangos should have been decimated. So much for a new broom.

  9. Alan Jutson
    Posted June 23, 2010 at 11:59 am | Permalink

    Interesting that none of the media (that i am aware of) have picked up on this increase you outline so far.

    What is it that they say about statistics !

  10. MartinW
    Posted June 23, 2010 at 1:03 pm | Permalink

    What I am looking for is a 30% cut in the BBC handout (£1 billiion saving IS worth having). And a severe cut in the EU handout. And huge cuts in quangoland. And an end to paying huge subsidies to grow wind farms, and pointless waste on the wicked 'climate change agenda. And … And … Ah well, I can dream.

  11. A.Sedgwick
    Posted June 23, 2010 at 2:01 pm | Permalink

    Debt interest, overseas aid and EU contributions – key areas for serious spending reductions – not increases.

    VAT increase was a racing certainty for me – an easy tax to increase but does affect lower income people much more.

    Chancellor continues to build on a tax and benefit structure that needs pulling down and rebuilding over a Parliament.

    The illogic of an increase of employers N.I. is a tax on jobs and yet the whole tax continues. It should be rolled into a much simpler flat corporation tax regime. Tax profit not jobs. One implication is that all state employers would have a commensurate reduction in their funding, a small step to stopping the nonsense of paying the state with one hand and getting it back in the other.

    Amazed with all the tax complexities that taxing child benefit was dismissed so readily and found so difficult.

    Note that the £1000 increase in tax allowance does not apply to pensioners.

    • Alan Jutson
      Posted June 23, 2010 at 8:31 pm | Permalink

      £1,000 increase in tax allowance does not apply to pensioners,

      John can I ask why, as I am about to retire in the next 12 months.

      If above is true, can I get a very, very, very, part time job and qualify for the tax allowance of a working person, given there is to be no retirement default age.

      Or is this just another complication in a system which needs a complete review in order to be simplified.

      • simon
        Posted June 24, 2010 at 9:29 am | Permalink

        Alan ,

        Completely agree with you about systems needing a complete review and simplifcation . This generally applies to all systems but especially tax and benefit .

        If everyone got their heads together and came up with a proper plan (singular) which would deliver a real solution (singular) it would endure and we wouldn't need kludge with exceptions superceded by kludge ad infinitem .

        The public sector pensions scheme should be scrapped and replaced with a basic state pension pitched above the benefits level . This would of course require compulsion to save , perhaps through salary deduction . Only once everyone is in the same boat will a proper solution be reached for all .

        • Alan Jutson
          Posted June 24, 2010 at 7:54 pm | Permalink

          Simon

          More simple systems also easier and cheaper to run with less people, less office space, less heat, light, power, easier enforcement etc.

  12. S Matthews
    Posted June 23, 2010 at 2:46 pm | Permalink

    Giving Sheffield Forgemasters their loan, and taking it out of the subsidy for windfarms might have been a good idea in assisting enterprise Britain.

    • MartinW
      Posted June 23, 2010 at 10:00 pm | Permalink

      Yes, absolutely agree about Sheffield Forgemasters –

    • simon
      Posted June 24, 2010 at 9:33 am | Permalink

      Why can't Sheffield Forgemasters get a commercial loan ?

      Is it due to uncertainty of securing orders ?

      Or is it due to banks not lending to viable businesses ?

      Or is their business plan flawed ?

      Or is there more to this than meets the eye ?

      Please tell me if you know

      • manicbeancounter
        Posted June 24, 2010 at 11:26 pm | Permalink

        The media presented this investment as a near certainty to pay off. In those circumstances the banks would have rushed in to lend. The other reason for lack of available finance could have been that failure could bring down the company, so the banks could have been a bit cautious. However, if the government is willing to lend with less stringent terms than the private sector, amy business would plump for that route.

  13. no one
    Posted June 23, 2010 at 7:11 pm | Permalink

    not bringing the amount of tax paid by the standing army of many hundreds of thousands of indian nationals here on intra company transfer and other work visas up and in line with what brits and other europeans have to pay was a massive mistake

  14. Brian tomkinson
    Posted June 23, 2010 at 7:35 pm | Permalink

    When is a cut not a cut ? When it is a cut in government spending!

  15. Gabriel
    Posted June 23, 2010 at 11:07 pm | Permalink

    Prediction: there will be a renewed recession next year based on further collapse in the European government-debt markets and the fact that our economy is a palpable basket-case still predicated on the totally insane notion of ever rising house prices and debt-based consumption.
    After the recent furore, the press will be able to pin the disaster on Osbourne's imaginary 'savage cuts' and Labour will win the next election in a landslide.

    The only way to avert this is for MPs on the Tory Right to publicly denounce this budget now, to make sure they are heard and make damn sure that when Osbourne's economic policies fail, their failure is not pinned on *laissez faire fundamentalism". Time is of the essence. Think how powerful the example of Herbert Hoover has proved.

    Even if you think Osbourne's budget is genuinely the best he could have done given the political climate (and this is plausible), it still makes tactical sense to attack him. How else can you change the climate?

  16. Gabriel
    Posted June 23, 2010 at 11:27 pm | Permalink

    Take a recent example. Plenty of bloggers denounced George Bush for recklessly increading spending, for racking up national debt, for presiding over a demented system designed to send expensive loans to people who couldn't pay them back and for allowing the Fed to keep the funny money taps pumping. But when the crash largely caused by the above happened what was blamed? "Free market fundamentalism" and Obama coasted into office. ____Why? Because right-wingers largely restricted their attacks on Bush prior to the crash to blog posts and the odd radio appearance, wheras leftists spent 7 years denouncing him throughout the media as a hardcore capitalist loon. ____Some day soon, you are going to be on TV with some grinning Labour chump trying to explain how our renewed woes are actually the fault of too much spending, taxation, borrowing and regulation. The interviewer will say "if the Cameron government was really so statist, why didn't you say so at the time.". "Well, I did on my blog a couple of times, sort of" won't cut it.____Say it now, loud, for your country.

  17. Javelin
    Posted June 24, 2010 at 9:25 am | Permalink

    I went into HSBC to deposit £100,000 for 3 months – and did they want my money? – no not a bit of it. They don't offer savings accounts unless I deposit £500 a month into the account. How can we have a stable banking system when the most stable bank doesnt even want to take my £100,000 for a few months. It's madness built on sand.

    • Alan Jutson
      Posted June 24, 2010 at 8:05 pm | Permalink

      Javelin

      Can only guess you did not see the right person.

      Have been doing the rounds with High St Banks myself the last few weeks, to see what is on offer, found HSBC to be the most proffessional by far (not Banked with them before).

      Most Banks only interested in checking who you are, and wanting lots of paperwork from you to prove it,

      Advice on Savings accounts poor, some personel not even aware as to their own rates.

      Went into one Bank to be told "our rates are crap at the moment". EXACT WORDS SPOKEN TO ME. I thanked him and left.

      Most Banks (which I have seen) do not now give any recorded form of paperwork for withdrawal, or deposits at the time of transaction. you have to wait for a Statement and keep track on the balance yourself, No paying in books or cheque books (with a record) just lose bits of paper or plastic. They call it progress.

  18. christina sarginson
    Posted June 24, 2010 at 11:05 am | Permalink

    This seems a little bit confusing for me, I am not an economist and as I have said before in comments I have made I find the way it is phrased very difficult to understand. I am willing to work hard though at trying to understand it, if and looking for someone to help me. I agree with a comment made earlier it all seems like smoke and mirrors.

  19. richard
    Posted June 24, 2010 at 12:10 pm | Permalink

    The key is that there is a world of difference in what the public sector considers to be a cut and what those of us who work in the private sector consider to be a cut.
    Lets just say as an example, that in the public sector a budget for the forthcoming year for a department of Govt is developed and presented for approval, showing an increase of 15% compared to the previous years spending levels and that this equals in cash terms an extra £500 million pounds
    After this budget is examined by the Treasury it is agreed that next years budget should be modified to just a 7.5% increase which is therefore a £250 million pound cash increase.
    To those of us in the private sector this would be considered to be a big and welcome rise in money for next year but in the strange world of public sector economics this is a huge and devastating cut back and would be presented to the media as such.
    They would claim that there has been a 50% cut in their budget and that jobs would have to go and public sector unions would call for days of action or strikes as we call them
    Until this odd concept is altered there wil never be a permanent reduction in the size of state spending

  20. manicbeancounter
    Posted June 24, 2010 at 11:57 pm | Permalink

    Sorry John, but this appears to be a public relations exercise. If you assume 2% inflation, then total government expenditure is static. Although with reasonable growth the fall in unemployment will still mean a tiny real increase overall.

    The more positive aspect is writing to 6m million public sector workers. More than 95% will be binned, but the small number that contribute will help to increase public sector productivity in numerous ways. In so doing they will be helping towards the seemingly contradictory aims of providing for the needy and serving the taxpayer.

  21. Lindsay McDougall
    Posted June 26, 2010 at 5:03 am | Permalink

    I can't pretend to be happy. Our deficit reduction plan is now little better than Alistair Darlng's, and we are still relying on growth rates in excess of the long term average of 2.1% pa. It is not we that need hope but our children, and getting rid of debt is the key to that hope. The cuts are insufficient and getting rid of waste is not enough.

  22. Neil Craig
    Posted June 26, 2010 at 11:00 am | Permalink

    Cutting CT to 24% brings us back into competitivity but not close to the front runners. Ireland achieved its 7% growth largely by cutting CT to 12.5% which would require a 4% annual drop over 4 years (that would have taken anothor £5.5 bn in the first year). I can see why that was politically difficult but if it improves growth even a little would have been well worthwhile.

    I would like to think that if the Laffer curve means the CT cuts do not cost as much as a strict arithmetical calcuklation would show that the saved money will be put back into further cuts. If so it would improve investor confidence markedly if the Chancellor was to say so.

  23. Neil Craig
    Posted June 26, 2010 at 11:02 am | Permalink

    Apart from the CT cut it is a budget for fiscal responsibility rather than growth. However putting a tough framework in place while the government's honetmoon period is on is worthwhile (& properly puts the oprobrium on the previous lot).

    Having plugged the massive leak in the ship of state I hope the next years will be put towards getting the engine of growth running. China is managing 11%, India 10% & the world average is returning to 5%. There is no doubt that we can do so very much better than 2%. On those grounds I would have liked to see the cuts more targeted on particular, regulatory departments & quangos. 30% across the board does not achieve structural change whereas a 95% cut in the "planning" regulators & "heath & safety" departments would have achieved similar cuts & ended far more economic destructiion.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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