The Budget: What’s it got to do with economics?

March 19, 2010

Laurence_Copeland Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. He might participate in a Reuters Budget live blog at noon GMT on Wednesday, March 24, 2010. Please tune in and join the discussion.

The UK media have a long-established tradition of investing Budgets with a theatrical level of tension far in excess of their economic importance. It remains to be seen whether they will consider next week’s budget worth the effort of building up, because it is likely to be a complete non-event.

In fact, it ought to prompt the question: why on earth do we need a budget only six weeks before a general election has to be held? Why could it not be postponed? After all, barring a cataclysmic event in the security domain, the new government will immediately set about preparing its own budget, making next week’s farce totally and instantly irrelevant.

The answer, of course, is that this will be a Budget for the benefit of the Government, not for the UK, and as such it will have nothing whatever to do with economics and everything to do with politics. In this most cynical of exercises, every penny will have been calculated to ingratiate the current administration with one or other sector of the electorate while catching the Tories off balance – not very hard to do, given the slow-witted reactions we have seen from the Cameron-Osborne team so far.

On April 1st, fuel tax is due to rise by 2.5p. It would be no surprise if this long-scheduled rise were abandoned or postponed (the distinction is meaningless in this context), allowing the Government to appear to be listening to peoples’ concerns (“feeling our pain”) while costing virtually nothing. You might think that reducing tax revenue ought to be the last thing on the mind of a Chancellor facing the largest peacetime fiscal deficit in our history, but it would be entirely consistent with the scorched-earth policies we have already seen.

Mention of scorched-earth policies reminds us of the paradoxical state of affairs in Britain’s political economy today.

For months now, the PM in his desperation appears to have been restrained only by his cabinet colleagues from bringing the whole house down Samson-like on the heads of his tormentors, which in his paranoid state means all of us.

How else to interpret the unending sequence of new spending commitments, for all the world as if it were still 2005 and the nightmare of the last two years had never happened?

But the irony is that the more the polls move in Labour’s direction, as they have in the last few weeks, the less sense it makes for the Government to be irresponsible in its fiscal policy.

After all, if there is any chance that Labour may actually get to form the new Government – with or without an overall majority – today’s tax cuts and spending commitments will only add to the problems faced by its own Chancellor after the election, a thought which, even if it does nothing to moderate Gordon Brown’s destructive zeal, may at least strengthen the resistance younger colleagues who can still look forward to a future in politics in the years to come.

So the treat we can look forward to – I mean “treat” in the same sense as root canal work at the dentist – is, first, an interminable catalogue of Labour achievements and taunts to the other side, laced with mostly small-scale tax sweeteners intended to grab the headlines while daring the Opposition to carp, followed by the traditional response from the Shadow Chancellor.

In a sense, he ought to be the focus of attention, since it may be his last chance. He has to do three things in the space of a few minutes: nail the charge sheet firmly to the Government’s door, set out clearly what a Tory administration would do differently and dispel the doubts of many people across the political spectrum that he is anything other than a lightweight. Nothing in his record so far suggests he can do it, but you never know.

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