It’s not the latest OBR forecasts of a further 23 per cent decline in oil and gas tax revenues this year – important though this is.
A central feature of the Budget – and the reason why it received a generally warm reception across the commentariat and the media – was the relaxation of the rules surrounding access to people’s pension pots. No-one need now buy an annuity. Those approaching retirement can now draw down as much or as little of their pension pots as they want, when they want.
It is not without controversy. For it raises an age-old question in finance: can we trust the people with their money?
An immediate chorus of concern has arisen that pensioners would now go out and blow the money on roaring Lamborghinis or conservatories the size of the Botanic Garden.
Now this is always a risk. But it is a fair one to take, for people are generally more cautious and prudent with their savings than such concerns allow for. And how ironic it is that the voices of concern have typically arisen from those in financial services, the regulatory industry and those in the previous government who hardly set the best example for prudential stewardship of our finances.
This cry of “trust the people” is an instinct often buried and all too rarely revived. And if last week’s reaction to the Budget is any guide, it may help to restore the government’s flagging fortunes ahead of the general election.
What relevance might this have for Scotland with the independence referendum now less than 200 days away? From the outset the central pillar of the argument for devolution is that a Scottish Parliament with more powers over taxation would not, as some feared, blow all the money on extra spending. On the contrary. A Scottish Parliament with the extra responsibility in having to raise more of the money it spends would be likely to act more cautiously in its spending decisions. Raising tax sharply defines parliament’s accountability to voters.
This was at the heart of the case for the initial powers to vary tax up or down by 3p in the pound. And it formed the basis of the 2012 Scotland Act, which gives further powers to the Scottish administration in the field of taxation. It would now be accountable for finding almost 25 per cent of the money it spends.
Faced with rising support in the polls for the Yes campaign the pro-Union parties have said they would support further tax and spending powers. Labour’s proposals unveiled last week have been boxed in by commitments not to use such extra powers to vary the standard rate of income tax and only to vary the higher rate of tax upwards. These limits were vigorously defended by shadow pensions minister Gregg McClymont MP when he addressed a public debate by the Institute and Faculty of Actuaries in Edinburgh last Thursday, and by Labour leader Ed Miliband who warned of a “race to the bottom” on tax.
Now the ball is at the feet of Tory grandee Lord Strathclyde, former leader of the House of Lords, to draft the Conservative response. Looking at the principle invoked in last week’s Budget and the generally favourable reaction to it, he may well feel that Conservative fortunes north of the Border would be enhanced by a similar bold stroke: a significant increase in the tax-raising powers of the Scottish Parliament and altogether less reliance on the “annuity” of the Barnett Formula.
The option of more devolved powers for the parliament, rather than full independence, is one Scottish voters have consistently stated as their preference. So there is latent support here on which the Conservatives could capitalise. Osborne’s example may have a resonant message for greater freedom in taxing and spending in Scotland – a stroke that could save the Union.
As for the Budget aftermath generally, the most salient critique I have seen thus far has come, ironically, from the Thatcherite think-tank, the Centre for Policy Studies. While it finds much that is commendable, “what was missing”, it says, “was a clear sense of direction, an overall strategy for economic reform”. It lacked the “bold clarity of the great Howe and Lawson reforming budgets of the 1980s. Where was the big picture?”
This lack of a coherent and cogent strategy, it argued, exposed some internal contradictions. While George Osborne announced pro-growth supply-side reforms and kept to the programme of deficit reduction, he also “increased tax complexity, increased pork-barrel spending and gave higher estimates for cyclically adjusted net borrowing.
“What is needed now”, it added, “is a dynamic programme of supply-side reform, clearly focused on increasing productivity – the only sustainable route to greater prosperity for all.”
But productivity was not mentioned once in the Budget speech and the OBR forecasts relied heavily on a “very optimistic assumption” that business investment will increase as a share of GDP from 8.2 per cent to 10.8 per cent at the end of 2018.
My own concern remains over the continuing size of annual borrowing (£112 billion) and how Public Sector Net Debt, up by 46 per cent since 2010 and set to peak at 78.7 per cent of GDP in 2015-16 will be paid down.
The assumption is that, whichever Westminster government is elected next May, it will pursue a combination of tax rises and spending cuts as far ahead as we can see. That’s brave – and it assumes no setback to the narrative of upturn for years ahead. Economies seldom behave in such a benign, linear fashion.
So what might be the solution? The question is now frequently raised as to whether we face a greater threat from deflation than inflation. My view is that inflation is the greater threat because I cannot see any other politically acceptable way of addressing this colossal debt overhang.
Savers are not off the hook. «