June Budget 2010 comment: Why odds of a double dip recession have reduced
Midland business expert Professor David Bailey gives his considered verdict on George Osborne’s emergency Budget
In the end there wasn’t much detail on where the spending axe will fall. That will come later in the autumn.
We already knew that “non core” departments face cuts of 25 per cent unless, as the Chancellor said, the welfare bill can be brought down further.
But it is clear now that the priorities of government have changed fundamentally.
This is no great surprise after weeks of deficit hysteria whipped up by the Tories, aided by their new chums the Lib Dems.
Minimising job losses through a recession and credit crunch imposed on us by an implosion in the financial system is no longer the top priority. Rather, plugging the deficit is goal number one, and we see a remarkable “age of austerity” beckoning across the UK, Europe and beyond.
Many leading economists, including David Blanchflower – the one member of the Monetary Policy Committee who saw this mess coming – and Nobel prize winners Paul Krugman and Joseph Stiglitz, see this “turn to austerity” as a huge mistake.
It brings back memories of what happened in the 1930s.
And before we all get mesmerised by the detail of what taxes are going up or what benefits are being frozen, we need to pause for a moment and reflect on the logic – or lack of it – in the Government’s stance.
The newly created Office for Budget Responsibility (OBR) said only last week that the UK economy is growing more slowly than previously forecast, that the fiscal deficit has come in lower than expected, and that the previous government’s own plans for deficit reduction would actually get the structural deficit down to under three per cent of GDP in four years.
In other words, what the OBR said didn’t back up the Tories’ claims made during the election.
If keeping an AAA rating on UK sovereign debt is indeed the goal (which by the way it never was in Canada) then the much-derided Alistair Darling would probably have done enough to keep that without exposing us to all sorts of extra pain – and risks.
Labour’s own deficit reduction would have anyway meant the tightest public sector round in 2011 since the second world war. What we are seeing now is extra pain.
Put another way, one wonders what the real motivations are for the new coalition government.
Is it about much-needed deficit reduction or is it really about seizing the opportunity of ‘crisis’ to drastically shrink the state for the sake of it?
Detail on the distribution of cuts will come later this year but what we did see was a significant fiscal tightening. Its highlights – or lowlights depending on your point of view – were the rise in VAT to 20 per cent from January 2011 that will bring in an extra £13 billion a year, public sector pay frozen for two years for those earning over £21,000, the freezing of child benefit for three years, and a £2 billion a year levy on bank balances.
The latter is a pretty pathetic figure when one considers the huge damage imposed by the banking system on the wider economy.
Osborne told the Commons that an 80/20 rule of spending cuts as against tax rises would indeed apply, as trailed.
He also moved to increase benefits - with the exception of pension and pension credits – in line with the CPI index rather than the RPI index, saving some £6 billion by the end of the parliament.
Meanwhile pensioners are to get a “triple lock” guarantee of an annual increase in pensions in line with earnings, prices or 2.5 per cent, whichever is the highest, which is likely to be a vote winner.
Some cover for Cable and Clegg was offered by the increase in personal allowances for basic rate taxpayers by £1,000 to £7,475 from next April, taking 880,000 of the lowest paid out of income tax altogether, as a first step on the road to increasing this to £10,000.
This was a key Lib Dem manifesto policy but will it really be enough to offset the pain caused to those on low incomes by the “shock and awe” VAT rise – a hugely regressive tax – and freeze in child benefits?