That was a budget for growth?

March 21, 2012

–Patrick Nolan is Chief Economist of Reform. The opinions expressed are his own.–

The UK’s public finances are not out of the danger zone. This can be illustrated with a quick comparison of today’s Budget with earlier ones: in June 2010 the target for public sector net debt was expected to be 69.4 per cent of GDP in 2014-15, now it is 75.0 per cent. All up public sector net debt is still expected to increase by £440 billion over the next 5 years.

On tax the Chancellor brought forward the increase in the personal allowance. This is expensive and does little for “fairness.” (Reform estimated that only £1 in £14 of an increase in the personal allowance to £10,000 goes to people below this level.) This poor targeting creates economic as well as fiscal costs – with this policy providing no incentive to work harder or grow the tax base. Indeed, by making tax avoidance more attractive to middle income families this policy may shrink the tax base.

There is a stronger case for cutting the 50p rate. Yet while the tax system would clearly be better without the 50p rate this was not the biggest challenge facing the tax system. It was probably not as damaging to entrepreneurship and enterprise as policies such as restricting visas for skilled migrants from outside the EU or clawing back personal allowances and pension tax relief. Further, by combining the cut to the 50p tax rate with the introduction of measures like a higher stamp duty land tax rate and a cap on overall tax reliefs, the overall tax system has become more hostile. A small problem has been replaced with a bigger one.

The Chancellor failed to properly address the earlier mistake in means-testing the Child Benefit. The Child Benefit is expensive and gives too much to wealthy families. Yet the policy of withdrawing the benefit from families with top rate taxpayers was never going to work. The approach in this Budget was little better and makes reform more complex. The better approach would have been to scrap the Child Benefit and to compensate low income families through the existing Child Tax Credit.

The Coalition’s numbers largely depend on achieving (as yet unspecified) further savings of £10 billion in the welfare bill by 2016. Achieving this additional spending restraint will be challenging and will require reform to middle class welfare (which Reform has estimated costs £31 billion a year) and pensioner benefits. Reform has argued that further savings could also come from having another look at the key ring-fenced departmental budgets, such as health and schools. It was these reforms, rather than tax giveaways, that we needed to see in this year’s Budget.

In his City AM editorial this morning, Allister Heath called on the Chancellor to reveal his economic philosophy. Perhaps today’s Budget did reveal a little of that. On spending, he wants to reform spending on welfare rather than on public services. On tax, he is not convinced by the arguments for broader bases and lower rates, for both income and consumption. For these reasons, his Budget is not as clearly a Budget for “growth” as he claimed.



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