UK budget deserves 6 out of 10

March 23, 2011

By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — George Osborne’s budget deserves 6 out of 10. Faced with a still-daunting fiscal challenge, the UK Chancellor has turned his attention to the factors that will shape the economy’s future. Businesses will welcome lower corporate taxes and the removal of obstacles to healthy, more balanced growth. Populist fiddles, such as raiding oil companies to help cap fuel costs, tarnish Osborne’s message. Nevertheless, his medicine should boost Britain’s growth — though not for a few years.

Osborne’s strategy is to make companies and investors, in the UK and elsewhere, see Britain as a good place to do business. He also wants to shift from what he called the “debt-fuelled” expansion of the past, to growth based on enterprise, manufacturing and exports.

The most welcome measure is his pledge to cut corporation tax by 2 percentage points in April — double the previously planned reduction — and then lower the tax to 23 percent by 2014. That should discourage companies from shifting their operations elsewhere — and may even prompt some to return.

Other smart moves include a proposal to end the UK’s absurd duplication of income tax with National Insurance, and a plan to automatically link the retirement age to increasing longevity. Highly-paid workers will also welcome Osborne’s pledge that the 50 pence top rate of income tax is temporary — even though it will not be scrapped just yet.

However, the Chancellor could not resist other, less productive meddles, such as creating 21 enterprise zones. These zones, which offer reduced taxes and services such as high-speed broadband, can help stimulate business in depressed areas. But they can also divert investment from elsewhere, while encouraging political favouritism. One enterprise zone will be in Sheffield — the constituency held by deputy prime minister Nick Clegg.

Other measures veered overtly towards populist crowd-pleasing. A 250 million pound scheme for house buyers will favour only a handful and do nothing to revive the broader market. Also far from impressive is a plan to whack up charges on North Sea oil and gas production, allowing the government to cancel a planned increase in petrol duty. That won’t make much difference to motorists at a time when high oil prices have driven up the cost of fuel. But it will further detract from the UK’s reputation as offering a stable and predictable tax regime for companies.

Osborne made further progress in increasing personal tax allowances, taking more low-paid people entirely out of the tax system. That is a good and equitable idea and helps economic growth. Besides, rewarding work — other than that of greedy bankers — is also part of the coalition government’s ethos of steering Britain away from unemployment or benefits.

But this budget won’t change the picture much in that regard. Osborne’s broader goal of reducing the fiscal deficit means the government will continue to withdraw funds from the economy. The big worry is that growth turns out to be even more disappointing. The benefits from today’s supply-side measures will take years to come through. In the meantime, the UK still faces a lot of pain.

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