Michael Kelly: Your dishonest little trick fooled no-one, George

WITH a sleight of hand worthy of Paul Daniels, Chancellor George Osborne smoothly sold a regressive Budget under cover of compassion yesterday.

The elegance of presenting the need for deficit reduction disguised the Tories' real trick – to cut the size of the state. Ever since the election, they have been revealing further "evidence" that the economy is in far worse shape than even they expected – despite contradictory evidence that borrowing is 30 billion less than forecast.

Let us concede the structural deficit increased partly because Gordon Brown failed to balance the budget over the business cycle. But that was not the only, or even the main, reason. First, the level of debt in the private sector – both businesses and households – was very high before the credit crunch, and the shock of that crunch caused them to reduce their indebtedness very rapidly, reducing spending and tax revenues, thus adding to the deficit. Then there was the necessity of bailing out the banks, without which Britain would have tumbled from recession into depression.

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So, contrary to the right-wing rewriting of recent economic history, the deficit was not caused by insidious public-sector expenditure spreading like a cancer throughout the economic body. The deficit shot up mainly because of failures in the private sector. Yet this Budget expects that unreliable private sector alone to grow us out of recession. In this way, the government justifies its reliance on public expenditure cuts to reduce the deficit. Osborne's mask only slipped a couple of times yesterday. The most significant was when he stated that from now on "business will play a greater role and the government a smaller one". That summed up the goal of the Budget.

Strip away the double-speak of "fairness" scattered throughout the speech and look at the facts. The cuts in benefits particularly will inevitably fall on the least well-off. So the coalition is in the indefensible position of making the poorest pay for the irresponsibility, greed and downright dishonesty of the bankers, who get a cut in corporate tax to ease the pain of the proposed levy.

It didn't take long for Nick Clegg (he'll stand as a Tory next time round) to go native, turning a deaf ear to grass-roots Lib Dems still sticking to their electoral stand on postponed and careful cuts. Because, of course, those kind of cuts had to be part of any Budget package. If the NHS is the world's third largest employer after the Chinese army and the Indian railways, then there must be vast scope for efficiency savings. Such cuts in health and education budgets need not adversely affect services.

But as the downgrading of growth forecasts shows, many of the cuts announced are not growth-friendly. They do not retain demand and services which support the improvement needed in the performance of the private sector. They are going to choke off the revenues essential for recovery. Double-dip recession is almost guaranteed. Rising unemployment is guaranteed.

The balance of the Budget package should have been tipped much more in favour of tax increases. Counter to all electoral promises, VAT has been increased – to beyond the rate that even the highly-taxed French have to suffer. This, again, is a measure directed at the poorest, because indirect taxes are regressive. There should have been selectivity here to protect the less well-off. In fact, the revenue should have been found from increases in direct taxation, which is progressive. Clearly, the PR skills that Danny Alexander, Chief Secretary to the Treasury, honed in a Highland park were not sufficient to sell large increases in direct taxes to Osborne. That choice of tax alone rules out any valid claim that this is "a progressive Budget from a progressive alliance".

On the other hand, in terms of protecting growth, there was a strong case for avoiding tax rises on business. The Budget introduced some relevant measures to encourage enterprise and small businesses. Whether that tinkering is enough to trigger private investment in a period of such low business confidence is, however, doubtful.

Loading so much of the burden of reducing the deficit on to people and households fails the test of fairness. There are options that Osborne ignored. A new tax on wealth would be fair and promote equality. A land value tax, for example, would raise the revenue without damaging enterprise. Ask any successful entrepreneur why he keeps working rather than living a life of leisure and luxury, and he will tell you it is not for the money. Well, let's take them at their word.

An equally revolutionary option would have been to introduce charges for a range of public services. Scotland has rather gone into reverse on this, abolishing prescription charges and bridge tolls. Even if we weren't in crisis, there is no good reason why many health, education and transport services should not attract charges. It's fair to expect those who can afford it to pay for it.

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Then there is then challenge of sweating public sector assets to produce additional returns. Classrooms, IT-ed to the eyeballs, lie unused for many weeks in the year. With a bit of innovative thinking, they could be helping small businesses and building skills.

Pursuing the unthinkable options takes us to the huge savings that could be made simply by abolishing local government. Under-employed Holyrood could easily administer its functions. If that's too radical, then dramatically reduce the number of councils from the present 32: North Ayrshire, East Ayrshire, South Ayrshire – come on! Even amalgamating backroom functions would allow savings to be diverted to maintaining services. Do the same thing for our universities – one central administration, many front offices.

But those kinds of sensible ideas are different from what we got yesterday. Britain did not vote for a reduction in the size of the state, but that is what Osborne gave us. For a few token concessions, the Lib Dems supported him. They may be centre-stage now, but will surely come to regret playing the conjuror's lovely assistant whose only role is to distract the audience's attention from what the boss is doing.