Yesterday’s Budget once again exposed the tragic reality of Britain’s slow motion bust. Osborne’s growth forecast for 2013 of 1.2%, announced just four months ago, was slashed to just 0.6%. He was also forced to admit that his target for reducing public debt as a percentage of GDP was pushed back to 2017-18, a goal that he had originally planned to achieve by 2013-14.
Meanwhile, the Institute for Fiscal Studies has warned that due to the fact that there has been no real growth in incomes since 2000, many British households will be no better off in 2015 than they were in the year 2000.
While it’s painfully clear to most of us that what’s needed is radical action (see How To Solve The Global Financial Crisis: A 20 Point Plan), Osborne’s latest Budget amounted to little more than rearranging deck chairs on the titanic.
There was some good news in the form of a further planned cut in corporation tax which will now fall from 28% to 24% next month, from 24% to 21% in 2014, and then to 20% in 2015. A new employment allowance was also introduced that will cut the first £2,000 from employers’ national insurance bills. Around 450,000 small businesses – one third of all employers – will now pay no employers’ NI at all. In addition the personal tax allowance will be raised to £10,000 from next year, rather than from 2015 as previously planned, however nothing was done to mitigate the forthcoming sharp rise in business rates.
Stamp duty for Aim-listed shares was also eliminated.
The Chancellor also announced that from 2015 the government would spend an additional £3 billion a year on infrastructure projects. However Osborne gave little indication of where the money would be spent, and £3 billion of additional capital investment in relation to a £1.55 trillion economy is hardly radical.
History also shows that when the new money does arrive it is likely to be directed at the wrong kind of projects. As Dr. Tim Morgan of Tullett Prebon put it, “Britain emphatically does not need long-term, big-ticket glamour projects like the HS2 rail link. What is needed is investment that can begin virtually straight away, that will take up slack capacity, and that will meet real economic and social needs”. His suggestion is that the money should be spent on a major programme of building social housing for rent, something which is certainly urgently needed.
Further cuts in government spending were also pledged, however these will not take effect until after the next general election. As noted previously, despite all the talk of austerity, the amount of government spending Osborne has actually cut is miniscule in relation to the increases in public spending witnessed under Labour.
As Dr. Morgan points out, “Between 1999-2000 and 2009-10, and expressed at constant 2012-13 values, Labour increased public spending by £264bn, or 57%, from £460bn to £724bn. Even if we allow for the impact of an ageing population, Gordon Brown presided over a real-terms spending increase of around £200bn, against which the current administration has reduced expenditures by only £20bn”.
Again, what’s needed is radical action and what we getting from the Chancellor is tinkering.
Where we did see radical measures announced yesterday was when it came to the government’s latest attempts to re-inflate Britain’s housing bubble. Their plan is to provide further help to home buyers via of two schemes. The first is an ‘equity loan’ where the government lends buyers with a 5% deposit up to 20% of the value of a new build home, and the second is a ‘mortgage guarantee’ where lenders will be incentivised to make more mortgages available, which the government shoulders a big portion of the risk.
Not only will these policies encourage home buyers (and lenders) to take on excessive risk, it will also help to push prices up making it even harder for people to get on the “housing ladder”. It also increases the risk of a sharp decline in house prices, something which would once again leave tax payers exposed to losses and potential bailouts.
Allister Heath, Editor of City A.M., sums up the Budget well: “There are two Osbornes: the dangerous gambler addicted to cheap credit; and the fusty purveyor of ‘steady as she goes, tax cuts cannot be afforded’ fiscal orthodoxy. It is such a shame it isn’t the other way around: we need a fiscal revolutionary but monetary conservative. By taking the wrong kind of risks, he is storing up massive problems for the future.”