23 Jun 2010

Nightmare verdict on ‘unavoidable’ budget

“Somewhat regressive” were the words that the coalition, particularly the yellow half, really would not have wanted to hear from the Institute for Fiscal Studies (IFS). Add in Robert Chote’s questioning of just how “unavoidable” was the VAT rise, and you have pretty much the nightmare assessment from Britain’s fiscal Praetorian Guard.

To some degree the budget itself stole some of the thunder of the traditional flash of lucid honesty that we get from the Institute for Fiscal Studies post-budget briefing. Indeed that may have been the intention.

Two key areas that the Labour Treasury had left for the IFS, were announced in the Budget document itself. The implied, though not announced squeeze on not protected government departments and some analysis of comparative winners and losers were included in the Red Book.

David Cameron was right to boast about this welcome transparency at PMQs, and the credit should go to the chancellor’s chief of staff, who is also a former IFS economist.

However, in both the areas that I critiqued in last night’s C4 News, and blog, the IFS seems to contradict the Budget claims.

On “fairness” the IFS conclusion is pretty concerning for the coalition. As Robert Chote says: “The Budget seems less progressive – indeed somewhat regressive – when you take out the effect of measures that were inherited from the previous government, when you look further into the future than 2012-13 and when you include some other measures that the Treasury chose not to model.”

Now you can have a vigorous philosophical debate about whether a pre-announced Labour plan that is confirmed by the new government should count as a “new measure”. Almost all of the cause of the progressivity that Mr Osborne and Mr Clegg tried to announce yesterday are in fact those measures inherited by Labour.

The IFS produced a devastating graph (Page 17 of this document) showing far from yesterday’s protestations, that in 2014/15 the impact of the new direct tax and benefit measures announced yesterday, cost the poor, and benefited the rich.

And that’s taking no account of the distributional impact of the spending cuts.

George Osborne previewed the extent of the savaging by pointing out an indicative figure of 25 per cent cuts by 2014/15 for departmental cuts in non-protected spending areas such as transport, housing, universities etc. The IFS showed how you get to that number.

Yesterday’s Budget implies an overall cut of 14 per cent to all government departments. Protect health and aid and you get to that 25 per cent number. Partially protect defence and schools (say, a 10 per cent cut) and the Home Office, Business Department, Transport, Universities etc will have to be cut by a mammoth 33 per cent.

The context is that these would be the biggest cuts since before the Second World War. Six years of consecutive spending cuts has never been achieved before, we’ve only ever had two consecutive years before. This will be a challenge.

Then, just how unavoidable was the VAT rise, as the Chancellor mentioned in his speech? The IFS show that the net additional tax rise announced yesterday was £8billion. Or put another way, a £20bn tax rise (mainly a £13bn VAT rise) minus a £12bn tax giveaway.

So to be absolutely clear, in the absence of the tax cuts, the VAT rise was utterly avoidable. Another way to look at it: That the VAT rise was unavoidable because of the coalition negotiations with the Lib Dems.

21 reader comments

  1. Ray Turner says:

    A VAT rise was obviously coming. Labour would also have used that weapon of mass taxation if they had been re-elected…

    1. Lacplesis says:

      what is the basis for this statement please? I don’t recall the last Government proposing this. So – evidence please, rather thasn supposition!

  2. Andrew Dundas says:

    It isn’t true that so-called overspend was caused government. That is a calculated inexactitude.
    The cause is well documented and admitted: US Banks lent to uncreditworthy borrowers and the loans sold to Banks all over the world on the false promise that they were AAA quality. Consequently, banks have written off their assets worth many billions, causing a collapse in tax revenues all over the world. As wholesale markets closed, growth turned to decline and an avalanche of debt has hit all countries.
    Because the UK has ALWAYS had the largest share of our GDP in financial services, our drop in tax revenues has been steepest. Hence the sole cause of our sovereign debt. At 62% of GDP it’s still modest by international standards.
    All these, and the extent of the debt, were well known before the election: another calculated inexactitude claims that the size of debt was a sudden revelation. It was actually smaller than estimated in March.
    Only Japan in the early 1990s has attempted to cut spending during a recession. Japan has been rewarded with stagnation ever since. That’s where we’ve been put now!
    As unemployment swells, debts will rise further.

    1. paul begley says:

      Support for this on one of those IFS slides, showing growth of public sector peaked around 2003, and was declining at the rate GO etc now want achieve until the crisis hit – ie public/private balance was being corrected until the govt had to clear up the bankers’ mess.

  3. Sabine K McNeill says:

    I’d like to suggest that, what really matters is the growth of interest payments in the austerity budget.

    See http://bit.ly/dthNsF

    It shows and underlines what Faisal wrote before: the Bank is now in charge…

    In the name of “democracy”???

    Sighingly yours,
    Sabine
    Organiser, Forum for Stable Currencies
    http://forumforstablecurrencies.info

    1. Andrew Dundas says:

      I’m not sure what Sabine implies by ‘the growth of interest payments in the austerity budget’?
      Interest costs on British sovereign debts rose to 5.2% of national income in 1997-98 and are now projected at around 3% of national income.
      Which is a lot lower than in most of the OECD countries.
      If my own interest payments were as low as 5.2% of income I’d be even happier.
      The interest costs on British sovereign debt are truly negligible – it’s the speculative scare stories about made-up visions of the future that worry some people.

  4. adrian clarke says:

    The proof of the pudding is in the eating.
    Unlike Andrew i do not support the idea that the debt was wholly created by the USA .It was caused in part by the banks but mainly by Labours reckless spending on some good projects without the necessary controls as to where money went .Similarly the banking crisis was caused (to a degree by Labour) for the lack of control over the British banking system.It is one thing to produce and spend copious amounts of money , but lack of control will put that in jeopardy.Look at BP and their production/collection of oil.Failure to regulate and control has created a monumental disaster both for the environment and the company. Left to their profligacy ,Labour would have lost us the AAA rating and we would be in an even worse mess .
    The real question should be ,has the problem been caught in time ?Will the remedy work? I have seen no report that the actions taken , though painful , will not maintain the AAA rating and eventually lead to financial control and growth again .

  5. Y.S. says:

    In C4 News it showed a women paying £650 a WEEK in rent in Islington and the Housing Benefit was covering most of it. The same £650 where i live would give a nice semi with gardens in a nice area for a MONTH.

    1. adrian clarke says:

      i agree it is a disgusting abuse of the benefit system .Council house rent here in Derbyshire ,that would cover 10 weeks

  6. cheekymonkey says:

    Hi

    I’m going to ask what might seem like a really stupid question. If anyone can answer it I would be really grateful. Who does the UK actually owe money to? We are in over £900 billion debt- but to whom? on debtbombshell.com it is described as

    “Every year the UK runs a large budget deficit. The Government spends more money than it can tax, so we plug the gap by selling bonds to investors at home and abroad. These bonds – known as gilts – have to be repaid in full, with interest. Added together, our unpaid loans make up the UK’s national debt.”

    If we spend more money than we can tax where do we get the money?

  7. Charles Jurcich says:

    CheekyMonkey,
    Your question is the most important question that never gets answered.

    80% of the money we owe is to our own UK pensioners. Pension funds have an obligation to have a percentage of their funds which are ‘risk free’ i.e. government debt. Government debt is risk free because we have a fiat currency, which means, the goverment can spend what it likes, provided it can mitigate the consiquences i.e. inflation, which it can do with ease. Any talk of the government having to ‘spend what it can afford’ or ‘what it can borrow’ is nonsense – but no one will ever admit to that – hold on – except the americans, who already know this and are encouraging us all to embrasse our fiat currencies, and turn our backs on fiscal austerity – quite right to!

    Long live the queen, and her governments primacy over the markets!

    Please tell Cameron this, because he doesn’t appear to realise it.

  8. Andrew Dundas says:

    Most UK Bonds are sold to UK Financial Institutions (Banks and pension providers especially) and, recently, £200Billions were purchased by our very own Bank of England. A small variable proportion is sold to foreign buyers.
    What really matters are the size of debt relative to income (currently @ 62% of national income) and the rate of interest payable. Which rate is not much nowadays because many people with surplus cash to invest are wary of share markets because of their aversion to current risks. So the Bond buyers outnumber sellers and their market value has risen; that rise has the effect of pushing down the interest rate.
    During 1998 – 2002, investors complained that UK Government was repaying too many debts, which restricted the supply of Bonds for those that wanted to buy them. It’s a change!

  9. Y.S. says:

    CUTS is CUTS, someone is affected else it would not be CUTS. Get over it people like it or not its how and what we impliment it on that counts.

  10. Barry Wheelock says:

    Copy of what I have today sent to Osborne at Treasury

    Make Usury Rates Illegal and Inflate Economy and Exchequer
    Dear Chancellor
    It is time the banks are properly brought to heal for the benefit of the nation. Make it illegal for them to charge more than 5 times the base rate on any credit card. How can they possible justify the rate of 17% when base rates are of 0.5%? They can’t, it is utter usury and greed.
    If credit card rates are 2.5 % people would feel better off, their spendable income would be greater and they would spend more money. This would reflate the economy and increase the take for the Exchequer. QED.
    Why stop at Credit Cards? Whilst we are at it, let’s change this culture across the board. Make the maximum interest rates for personal loans 5 times the base rate.
    Now let’s think of a scheme to ensure for the first time in decades banks back Britain’s entrepreneurs. In every street in Britain we have extraordinary talent, which the country wastes, thanks to the banks!
    You can’t force a bank to back a company but you can encourage them by law not to insist on property-backed lending. For example, if the banks want to continue to have the financial backing of the British people they must stop taking the p—–s.
    • So all new businesses should have the first £50,000 of loans unsecured.
    • Banks should be encouraged by the tax system to invest in small and medium sized companies – i.e. take equity.
    • The Chancellor should change banking culture so they see that the way to make huge profits and big bonuses is to back fast growing companies by taking equity stakes and selling them down the road. In this way they will be encouraged to stick with new companies through the ups and downs they all inevitably have in the first seven years.
    Is our new Government bold enough to push this through parliament?
    Good luck
    Yours sincerely
    Barry W Wheelock

  11. akamrburns says:

    Slightly off topic…a comment about the piece on bank lending last night.
    As your piece highlighted, Bank lending to business is going down (certainly in the case of RBS). The excuse given last night was that businesses are not wanting to invest and were reluctant to borrow. Now I wonder why? Market uncertainty? Yes, but this is only part of the reason. Think back to what banks did at the start of the downturn. (always bear in mind please, that they were the cause and the catalyst of this event)Across the country banks tightened their terms. They reduced facility levels, restructured loans at higher rates and increased their charges. These actions put thousands of businesses into survival mode and put many more thousands out of business. Instead of supporting their business customers through tough times, they turned the screw. What’s changed since then? Nothing. Facility levels are as tight as they ever were, and bank charges remain high. Is it any wonder that businesses are not borrowing? Before businesses borrow they need to be able to trade without the fear of the rug being pulled.
    Let’s be absolutely clear about what is going on. Banks have engineered this so that the focus is on businesses not borrowing rather than banks not lending. Whatever they say, they do not want to lend.
    What we should be demanding from banks is that they release their stranglehold on businesses. They need to reduce their charges, reduce their borrowing rates and give restore facility levels and allow businesses breathe again.
    The amount that businesses borrow does not necessarily translate into business health. What businesses need to be creative, to trade profitably and to have the confidence to contemplate borrowing, is a supportive relationship with their banks. The banks destroyed this relationship and have not been in a hurry to restore it.
    Most people have absolutely no idea of the nightmare most businesses have suffered as a result of the behaviour of the banks. Banks behaviour is judged in ‘global’ terms, such as how much they are lending. Few people know about their behaviour at ‘local level’ which has been, to say the least, reprehensible.
    Businesses will not borrow, the country will not start to grow again until we address the way banks behave ‘on the ground’.
    Britain needs to completely rethink how banks work with business. I believe we need ‘business banks’, owned in part by the state, that actively help our businesses to survive and prosper. If we continue the way we are going we will not achieve the growth we need to reduce the debt and increase prosperity. Why? because the self-interest of the banks.
    Time for change. Time for a C4 investigation?

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