Osborne unveils a momentous project

June 22, 2010


Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.

We were promised a Budget that would be a game-changer, and that’s exactly what we got today – ambitious, dramatic, and presented with conviction and confidence (as it needed to be).
The Chancellor had four objectives in view:

1. To cut both the deficit (the additional borrowing) and the level of the debt over the life of the parliament, starting now

2. To make a virtue of necessity, by cutting benefits and taxes that create the insidious poverty trap, making it worthwhile for more people to join (or rejoin) the labour force

3. To restore competitiveness by reducing taxes on business, in the hope that it will induce enough additional investment to offset the deflationary effect of the spending cuts

4. To introduce measures to cushion the blow to the poorest families, and to ensure that the burden falls heaviest on the better paid

There can be little quarrel with these objectives. The most eye-catching points were:

• The deficit reduction to be 77 percent spending cuts and 23 percent tax increases – an ambitious target. The fear must be that, though the spirit is willing, the flesh is weak. The cuts will be decided over the summer and announced in the Autumn. In other words, we have seen only a quarter of the treatment – the remaining three-quarters will be revealed in October.

• The deficit to fall from 149 billion pounds (10 percent of GDP) to only 20 billion pounds (1 percent of GDP) in 2014-5 – in other words, what would previously have been regarded as an extremely tight budget, repeated for five consecutive years!

• Cuts of 25 percent in all departmental budgets, except the sacred cows: the NHS (!) and foreign aid (!!)

• VAT to rise from next January from 17.5 percent to 20 percent, raising 13 billion pounds annually. On its own, it looks as this measure is carrying about 10 percent of the total fiscal retrenchment.

• Disabled living allowance to be cut (the disabled will be re-evaluated by doctors and a substantial number will be reassigned from disabled to fit. I’ll believe this when I see it!)

• Corporation tax to go down by 1 percent a year for the next five years, from 28 percent to 24 percent

• Capital gains tax to increase, but not (as far as I can see) by enough to solve the problem originally cited to justify it. It will still be the case that capital gains will be taxed more lightly than income. Two or three additional loopholes have been introduced, supposedly to exempt lower-rate taxpayers (though it’s unclear to me how they get caught in the capital-gains tax net anyway)

• Tax allowances to be raised, though not for the higher-rate payers
• Bank levy to raise 2 billion pounds per year. This may seem a lot of money – until you look at what it is supposed to be for.

It was originally touted as a fund to cover the cost of bank bailouts. Since bailing out the UK banking system has cost at the very minimum 500 billion pounds, this fund will suffice to cover the cost of the next big crisis – provided it doesn’t come in the next 250 years!

After a budget as courageous as this  – I use the word both in its normal sense and its Sir Humphrey sense of “foolhardy” – it  may seem churlish to ask for more, but I have one big regret.

The major factor deterring marginal workers from entering the labour force, small businesses from taking on new staff, potential entrepreneurs from investing and innovators from establishing businesses is often not the level of taxes and/or benefits, it is the complexity of the system.

What worries me about some of these measures – especially with regard to income tax and capital gains tax – is that they may serve, albeit in a small way, to make things worse.

Gordon Brown was a Chancellor who never saw a situation he couldn’t make more complicated. He fiddled with capital gains tax and investment allowances as compulsively as a teenager picking at his acne.

We need to reverse course, by setting up a commission charged with the task of simplifying the tax and benefits regime over the long term, eliminating unnecessary loopholes, merging taxes and reducing the number of bands.

In the meantime, tax and benefit changes need to be examined not just in the light of their impact on the overall fiscal balance nor for their fairness, but also for their contribution to simplifying the system.

If they fail in the latter respect, they will also fail in the former.

Picture Credit: National Housing Federation demonstrators hold up improvised face masks of (L-R) Prime Minister David Cameron, Communities Secretrary Eric Pickles, Chancellor George Osborne and Deputy Prime Minister Nick Clegg after Osborne presented his first budget, in Westminster, central London, June 22, 2010. REUTERS/Andrew Winning

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