The last Budget book in March 2011 told us that the Coalition government planned to increase current public spending by 16% over the five years to 2014-15. It forecast an increase of 11% in total public spending in cash terms, as it has left quite a few of Labour’s cuts in capital spending in place. It estimated it would increase tax revenue by 36%, bringing the deficit down by 70% as a result. If the government enforces tough public pay freezes and improves public sector buying as promised, these cashspending figures translate into little change in real terms.
The Autumn Statement cut the forecast revenue increases, as the government decided to turn more pessimistic about the likely growth rate of the economy. The March 2011 forecast of total extra borrowing of £485 billion over the five years soared to a forecast £563 billion as a result.
This 2012 Budget is unlikely to have to report more bad news about less revenue or more involuntary spending. It is likely to worry about growth, as the growth rate in the economy is central to achieving the large forecast increase in tax revenues the strategy rests on. The government is likely to concentrate on two major areas to promote growth.
The first si they will seek a private finance route to reinstate the cuts in public capital spending they inherited – or alternative projects to take up the slack in construction. We have seen today the outlines of a scheme to build more roads. Mr Cameron’s speech has also promised decisions on airport, energy and water capacity. We know they are working on away to tap pension fund money to finance better infrastructure.
The second is they will seek new ways round the finance blockage caused by the tougher regulation of banks. The banks are struggling to meet much more stringent capital requirements. That means they lend less, or fail to expand their lending, as they seek to improve the ratio of capital to loans. The government is likely to try to find a way round this regulatory constriction. They have announced a mortgage loan extension scheme, and are now poised to announce help for lending to small and medium sized enterprises.
It might be cheaper and easier simply to relax the capital requirements of the main banks. After all, we are now all meant to believe in counter cyclical regulation. That means allowing lower ratios of capital to loans when the economy is in or recently out of recession, and then demanding higher amounts of capital when the economy is in danger of overheating.
The budget also has to resolve how to tax the rich successfully. The Treasury now forecasts a fall in CGT revenue next year by some £500 million as the higher rate makes its full impact. Income Tax revenue was poor this January, with self assessment revenue down in cash terms. The past moves down in the top rate from 83% to 60% and then to 40% all boosted top rate taxpayer revenues massively. Will the Chancellor go for more revenue, or play to the gallery that likes soak the rich and successful taxes even if they do bring in less? To me the art of taxing the rich is to tax them in a way which makes them stay and pay.