AFTER weeks of leaks, hints, nods and briefings, one of the most heavily trailed Budgets ever should surely have gone like the proverbial clockwork. The lobbies had been listened to, the press squared and the figures added up, give or take.
Yet it may go down as The Budget That Blew Up.
Chancellor George Osborne this weekend is reeling from one of the worst sets of headlines ever to greet a modern Budget. It was almost universally dubbed The Great Granny Tax Grab. And as if this wasn’t enough, the Institute for Fiscal Studies weighed in, calling it a “hotchpotch of reforms”. It highlighted the lowering of the threshold for the 40p higher tax rate and speculated that the number of higher rate taxpayers could now rise from 3.7 million to five million by 2014.
The instant post-Budget poll by YouGov was no better. Only 32 per cent thought the Budget was fair, with 44 per cent saying it was unfair. A year ago 34 per cent thought George Osborne was doing a good job as Chancellor while 40 per cent thought he was doing a bad job, a net score of minus six. After last week’s Budget his rating is: good, 28 per cent; bad, 50 per cent. The net score is minus 22. The “granny tax” proved deeply unpopular. Some 64 per cent said they were opposed to phasing out higher tax relief for the elderly. Among the over-60s – who vote in greatest numbers at general elections – the figure rises to 79 per cent.
Osborne may well be feeling in dire need of a crate or two of the legendary Yorkshire Black Beer, which found itself the biggest loser from the Budget when its duty exemption was abolished. I am indebted to Neil Mitchell, partner of accountancy firm Mazars, for spotting this bizarre attention to detail at the Office of Tax Simplification. The sole producer of the Black Beer – just 35,000 bottles a year – is Mathers in Huddersfield. The alcohol content is 8.5 per cent in concentrated form. It is much loved by over-65 Yorkshire tipplers for its perceived medicinal and nutritional benefits. As a result of the Budget the price of a bottle is now expected to rise by £1.62 – a crippling increase. Hasn’t the Office of Tax Simplification got bigger things to simplify?
And how could the Budget get bigger things so wrong? Osborne has been widely regarded as the Conservatives’ master tactician. Not all the leaks, of course, were down to the Chancellor. Many were the product of the friction within government by coalition. But in the Treasury there was particular anger that the stamp duty rise in homes worth more than £2 million and a 2p cut in Corporation Tax were both revealed on Budget morning. It might surely have been obvious that, come the day, the hunt would be on for a story that was new and fresh and not a rehash of yesterday’s – or the day before yesterday’s – news. The phasing out of age-related reliefs and effective tax rise for pensioners fitted the bill. That the measure was presented as a piece of tax simplification simply put a thick icing of dissemblage on this cake.
The “granny tax grab” of course does not invalidate the Budget. And it may be of some comfort to Osborne that the IFS was not so condemnatory, arguing that pensioners have so far got off relatively lightly in the austerity era. But try telling that to a new pensioner who has watched annuity rates clattering down and who receives derisory rates on savings accounts, offering no protection against inflation.
The more serious charge against the Budget is that there did not appear to be a clear sense of plan or long- term thinking about the tax burden. It is a popular hit to take “more than two million” lower income households out of tax. But when you forswear higher taxes on the wealthy and any further rise in borrowing and debt, that means the group most vulnerable to further tax increases are those in the middle – the 40 percenters.
These now account for 15 per cent of all taxpayers. What is Osborne’s view – if any – as to how high this percentage should be allowed to rise? For without action to limit fiscal drag – the sweeping up by inflation of more people over the 40 per cent threshold – the 40 per cent tax rate could in due course end up as the standard rate of tax.
Meanwhile, how credible are the projections for the UK economy and those forecasts for the government deficit and debt? Will the UK keep its triple-A rating? Arguably the most striking feature of the growth projections from the Office for Budget Responsibility were how little they had changed. The OBR forecasts a fractional improvement in GDP growth this year from 0.7 per cent to 0.8 per cent. For next year the forecast has been shaved down a similar amount to 2 per cent. It’s hardly booming Britain – and despite all those measures to boost enterprise and investment, including an acceleration in the reduction of Corporation Tax, the IFS estimates the impact on growth of all these measures after five years at just 0.1 per cent. As the Centre for Policy Studies argues in a paper this weekend, Osborne should have been more, much more radical in helping the SME sector.
The figures on deficit reduction further underlined what a long haul back to normality this is going to be. The forecast for public sector net borrowing in 2011-12 is just £1 billion lower than the OBR’s projection last November of £127bn. And the Budget deficit in the next financial year marks time at £120bn. Here I was struck by the casual way in which the Chancellor dealt with the transfer of the Royal Mail pension fund onto the government’s books. The immediate “benefit” is the receipt of assets reckoned at some £28bn. These, he said, would be used “to pay down debt”. But the liabilities of the fund have a present value of £35bn. Given this deficit, the long-term implications for the public finances are more likely to be negative.
The graceful line of deficit descent critically depends on there being no more nasty shocks or surprises – in particular no re-eruption of the Eurozone sovereign debt crisis. And it also crucially depends on the government delivering on future spending cuts.
Here two details in the Red Book are of note. The first is a summary table of Budget policy decisions. This shows revenue from spending reductions heavily stacked towards 2014-15 (£960m) and 2015-16 (£1.17bn). Quite how such spending cuts will be effected in an election year (and indeed in the subsequent year where there may be a new government) may be a question the credit rating agencies will struggle with. The second gem is of relevance were the UK to lose its triple-A rating and interest rates were to be forced up. A one percentage point rise in interest rates would increase our debt interest payments over the next five years by £21.4bn. A three percentage point rise would increase the debt interest bill by £65bn – or more than double the annual budget of the Scottish Government.
Pass the Black Beer. We may be in need of it.