So how was the budget for you? Few are pleased that drinks are going up a lot, whilst the tax attack on motoring is postponed rather than cancelled. The headlines were understandably taken by the bad news on whisky, wine and wicked cars.
Beneath the front page stories the Chancellor shuffled a few hundred million here and a few hundred million there, as if he were running an economy one tenth the size of the UK’s. The overall increase in spending is dwarfed by the huge supplementary estimates that went through with precious little explanation on the Monday of budget week. The big tax hike on alcohol will pay for very little of those big spending increases, so we now know most of that money is going to be borrowed. Pensioners will welcome a one year increase in fuel allowances but they would have been more reassured if they were promised for future years as well.
The budget speech contained endless references to “stability†as if repeating the word would deliver the desired result. If the Chancellor really wants stability, he needs to take the kind of action the US is taking to prevent the sharp slowdown getting out control – tax cuts and more assistance in money markets. The reason he cannot do this, is he has allowed careless spending in his inefficient public sector, taking public borrowing and spending to record levels just before the downturn in growth hits the figures.
What we needed was a serious analysis of the turmoil in credit and banking markets; an explanation of how quickly the vast sums lent to Northern Rock will be repaid; and a drive to raise the productivity of the public sector to curb its inflationary costs. Instead we were treated to little homilies on plastic bags, drinking and driving, as if they were the most important things on the Chancellor’s mind. He should be spending his every working hour trying to get to grips with the credit crunch and the Rock mistake. That is serious money. This was a budget of penny packets that will have no overall economic impact, though it will annoy those in the drink trades.
Our economic destiny instead rests on global events, and on the wider financial conduct of the UK government. Of course the sub prime crisis started in the USA, and some of the worst strains in the system are in the US banks. If the US authorities are successful with their policies of slashing interest rates, pumping liquidity into the parts of the money markets that most need it, and offering substantial tax cuts to keep the consumer spending, that will help all of us. The banking problems do not stop on the Eastern seaboard of the US. The only serious run on a bank so far after all occurred in Newcastle, not in New York. The global banking system is interconnected and feeling the pressures throughout. The UK is so constrained by the size of its own annual government borrowings, that it cannot afford to make the tax reductions the US has been able to offer to stop the downturn getting out hand. UK inflation is so entrenched, in part owing to public sector costs like rail fares and Council taxes and charges, that the Bank of England dare not cut interest rates as strongly and quickly as the Fed.
To give us more room for manoeuvre the government needs to get a grip on its own spending. This year has seen billions more in spending overruns, as weak Ministers just present the larger bills to Parliament and borrow the money. If the government were not borrowing so much it would be able to keep off the higher taxes. If it were not borrowing so much we might justify lower interest rates.
If you truly want to run a stable economy then you have to avoid borrowing at all in the good times, even pay some off, to leave you space to borrow in bad times. Unfortunately this government took advantage of an easy credit binge worldwide to spend as if it were going out of fashion. It is time to sober up, and quickly, before it gets hit by its own higher drinks taxes.