29 Mar 2010

Osborne puts clear blue water between the parties

So it was bolder and bigger than anyone expected. A whopping cut to taxes, relative to government plans of £5.6bn, and over £4bn permanently.

First things first, the cut to national insurance contributions made by employers has been a top priority of business leaders. The CBI welcomed the cut, and lobbied for it in their recent budget submission. Unlike corporation tax, NI is payable even by struggling loss-making businesses, and this was seen as a pure “tax on jobs’” at a time of difficulty in the jobs market.

George Osborne is absolutely right that this will mean that seven in 10 Britons (earning under £44,000) will pay less National Insurance under him than under Mr Darling. The amount of their enrichment is around £150 per year, or £3 per week.

To be fair to the shadow Treasury team, they have made noises that a move like this was their priority since the PBR in December. It is noteworthy that they have kept the rise for higher rate taxpayers. This really is targeted on middle Britain.

But there are three issues relating to how this cut is funded.

First, this type of tax-lowering manoeuvre is highly certain and predictable in its effect on taxes. To fund such an operation, you would expect, an equally “solid” spending cut, or you run the risk of letting the deficit grow. Efficiency savings, as the government well know, are inherently motherhood and apple pie – they essentially promise lower spending with no impact on public services.

Essentially these are the same critiques the Conservatives rightly made of the budget. The documents from Gershon and Read do contain some interesting ideas. “Hammond the Knife” will, as Tory chief secretary to the Treasury, hammer private government contractors into in-year cost cuts.

Fair enough, Tesco manage this. Capita, Serco, and all those management consultants, beware. Then there’s property costs being reduced. And Martin Read points to how you can “Empower Finance Directors … to attack all discretionary spend, including travel, expenses, IT, internal projects and office consumables (paperclips? printer ink?).

But can you put a precise number of £12bn on this? And is all that £12bn additional to the £11bn announced by the government? And are all these savings really recurring every year over the course of the parliament.

The most credible, solid spending cut would have been, for example, some sort of cash freeze on benefits, or identified multi-year spending cuts to departmental spending limits. We did not get those from Mr Osborne, nor did we get them from the chancellor’s budget.

The reality might well be that these cuts, particularly this year’s, really will happen, irrespective of whether they are “efficiencies” or not. So public services will surely suffer if, for example, the 8 per cent of civil servants who leave each year are not replaced. So that’s nearly 3 per cent off all departmental Budgets, bar health aid and defence, over 10 months. Ouch!

Second, having made and won the argument on deficit reduction over the past year, the shadow chancellor has popped up a few weeks before the election with an expensive tax cut. The deficit is paid off marginally more quickly by April 2011 down to £157bn versus £163bn under Labour, i.e. before the lower NI kicks in in April 2011.

A credit rating agency might wonder why the money in subsequent years isn’t being used to pay more off the national debt. As the IFS point out: “Using the bulk of these spending cuts to finance the NI cut means that they are not available to contribute to the task of reducing government borrowing that the Conservatives have set such store by.”

Third, timing. As the IFS put it, “by cutting spending next year and delivering the tax cut a year later the Conservative proposal would take additional spending power out of the economy for a year at a time at which the recovery is likely to be at its most fragile’ and then the tax cut occurs in time for the recovery.”

It is, however, the clearest of blue water between the two main parties. But consider this: what would the markets have done if an NI cut has been included in last week’s budget?