Good luck, Chancellor

March 21, 2012

–Matthew Oakley is Head of Economics and Social Policy at Policy Exchange. The opinions expressed are his own.–

As an economist and ex-Treasury civil servant, the Budget always delivers mixed emotions for me. The 2012 Budget was no different.

Positives on a national level include the government progressing with a consultation into radical tax simplification for small businesses, and a pilot later this year for a programme of enterprise loans to help young people set up and grow businesses. Policy Exchange made the case for both in our recent report, Financing Innovation.

On a regional level, tackling the current system of National Pay Bargaining in the public sector (Policy Exchange has previously laid out the large distortions in the labour market that this practice leads to) will improve public services, using the money saved in smarter ways has a real chance of boosting growth in areas currently dominated by an inefficient public sector, and it provides us with a vital opportunity to link public sector pay to performance. It was also a relief that, contrary to reports in the press over the weekend, there will be no knee-jerk reform in this area.

However, the decision to levy Stamp Duty Land Tax at 7% for properties bought for over £2 million continues to complicate a tax that is already distortionary. While the politics of this are understandable, the economic rationale is unclear: if there is a desire to tax property in a progressive fashion, there are better ways of doing so.

It is also frustrating to see more changes to the corporation tax system. While cuts to rates should (nearly) always be welcomed, Policy Exchange has argued strongly that the instability and uncertainty that constant changes bring are detrimental to business and growth. This is particularly true when they are, again, financed mainly through increased taxes on our banking sector.

Overall on growth, the Budget is likely to come out positive, but leaves the toughest political decisions on public sector pay to the future. The same is true on welfare, where the further £10 billion savings that George Osborne says will likely be needed by 2016 will be tough on top of £18 billion of savings already made since 2010.

Another area for concern is the cost associated with the move to Universal Credit – the new benefit system that Iain Duncan Smith hopes will revolutionise our welfare system and finally make work pay. The problem is that increased work incentives come with increased costs and, while the Budget revealed a cap of £2.5 billion on these costs in the next Spending Review, this still increases the size of the welfare spending challenge. Most of the easiest savings have already been banked, and assuming Universal Credit is ring-fenced, future cuts are likely to have to be targeted on the removal of currently universal benefits, pensioner benefits, or disability benefits, any of which would be politically difficult.

Where will the savings come from? Is another storm between the Treasury and the Department for Work and Pensions around the corner? The future looks set to hold in-fighting at Whitehall, and bigger battles with the Unions. Good luck, Chancellor.

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