The top ten Brownies of Budget 2009
Fraser Nelson 9:15pm
This was a Budget of tricks, of bogus assumptions and of huge traps for the Conservatives. As Lord Lamont says, it was historic in its admission of failure. I do tire of the Treasury’s approach: every Budget we get pie-in-the-sky forecasts, which are torn up later. But the effect of these fake forecasts is to advance (or, in this case, protect) state spending. For all the mentions of 2014/15 this is a Budget designed to last no more than a year. Here are my top ten Brownies.
1. The “trampoline recovery” theory is a fiction. To reassure the debt markets (on whom the UK government is now utterly dependent) HMT has concocted the theory of what Cameron brilliantly and instantly called the “trampoline” recovery. Darling says 3.5% growth in 2011, and in 2012 and in 2013. There is not a shred of independent corroboration for this. The independent forecasts, compiled by the Treasury itself (released two months ago) show 2.2% for 2011, then 2.6%, then 2.6% again. The public finances are based on a concocted figure of 3.25%.
2. It was either fake forecasts or spending cuts. If the Treasury had used consensus figures, it would have to admit that the tax base was never going to come close to covering the spending bill. That would mean admitting that the size of state spending was unsustainable, or risk a buyers’ strike/IMF bailout. But it is a very fragile lie, which I doubt will convince many in the markets. It means the hard work will have to be done by the Tories,
3. Austerity, my foot. Staggeringly, buried in the Budget is a figure showing that real terms state spending in 2009/10 will rise by a juicy pre-election 5.5%. Unless I am missing something is the biggest increase there has ever – yes, ever - been in the Labour years. The cuts in spending growth are happening in 2011/12 and beyond. So this is profligacy, disguised in the language of austerity. A graph below spells this out. And worst of all, I don’t think it is deliberate I think the Treasury has lost control of state spending.
4. The 50p tax is a con. If the IFS say a 45p tax on those earning more than £150,000 pa will raise “approximately nothing”, then a 50p should be a net drain on the Exchequer as even the Treasury will know. The IFS will have its say tomorrow, but I suspect they have since been leant on by the Treasury so they may row back. The idea of a 50p tax is made on the calculation that the George Osborne is so terrified of Gordon Brown calling him a rich kid that he would keep the policy in place – and watch those golden geese fly away rather than argue that high tax rates cost revenue. Remember, the last time the top rate of tax was 50% was 1987, when the richest 1% generated just 14% of the tax. When the top rate was cut to 40% by Lawson, this jumped to 23%. It proves that, to get the rich to shoulder a greater share, you reduce the tax rate. Osborne may still be too intimidated by Brown to risk having a debate like this on his own terms.
5. Huge upwards revision in unemployment. Last October, before Gordon Brown saved the world, the Pre-Budget Report had grim news: unemployment was forecast to rise to 1.41 by Q4 2009. So the “stimulus” was launched to take the edge of this. Result? We can see form Box C1 of the Budget: claimant unemployment is now forecast to be 2.09 million. It is a simply staggering rise which proves that the so-called “stimulus” stimulated nothing more than the debt burden.
6. Oh, and that debt burden. It's forecast to be £1.4 trillion by 2013/14 which is a massive, devastating upwards revision from the £1.1 trillion noted in the Pre-Budget Report. And, without spending cuts, it won’t be the last.
7. Darling has given up trying to balance the books. At least in the PBR he extended the horizon to 2014/15 to show when he would (on his dodgy forecasts) reduce the budget deficit to zero. Darling had to fight Brown for that one, as Brown didn’t want the public to see tight spending. But rather than a balanced budget, in 2014/15 we’re seeing the deficit fall to a mere 5% of GDP. And this is after spending growth is curbed from 1.1% to 0.7% which is a real-terms freeze. Even if Darling’s forecasts were true, we’re be looking at the end of the next decade before the UK balances its books.
8. This makes radical spending cuts all the more inevitable. The next steps will be to watch the long (ie, 40 year plus) gilt auction and see if the City has stopped taking this government seriously. I have just spoke at a budget panel where Don Smith, chief economist at ICAP, said (and I quote) "There is a very high possibility of a serious buyers' strike". When growth returns, risk aversion will go and there will be even fewer buyers for the massive UK government debt. And, even today, gilt issuance was a total £260bn, a staggering 75 percent more than the Debt Management Office forecast a few weeks ago.
9. A lot in this to rev up the Labour base. Brown can’t seriously believe any progress on child poverty can be made in a recession – it is, for various reasons, driven by the cycle. There is an element of post-McBride pitching to the Labour grassroots. But if the Tories don’t make a case against high taxation, and try to get Labour in a boxer’s clinch, then the Tory base may wonder why it’s worth getting out to vote if the policies will be the same. There is not just 50p tax, but the whole ‘safety first’ approach of the Tories. They should dismiss this Budget and its forecasts as an irrelevance and start with a clean sheet.
10. Tomorrow’s newspapers will be awful. Especially given how many newspaper editors have just witnessed a major hit to their income for no good reason. This has a good claim to be the worst budget in British history. And I suspect a good many papers will say so.
Previous
Depressed & Distraught
April 22nd, 2009 9:24pm Report this commentBrownageddon.
Sally Chatterjee
April 22nd, 2009 9:39pm Report this commentA good round up, thanks.
I think the 50p rate will help the Conservatives for it exposes Labour as willing to use empty and symbolic ideas, rather than real policies, to fix a massive issue.
Even rank and file types in Labour will know it's not going to affect many people. This isn't about redistribution and equality, it's pure desperation and quick headlines.
Indeed, we should not be debating it much but should focus on the wishful thinking inside the Treasury. It is a sad day when the civil service is forced to pump out so many politicised forecasts.
TrevorsDen
April 22nd, 2009 9:43pm Report this comment50p - the Tories will inherit 50p and it will be raising money - or more importantly people will think it is raising money.
There are other priorities. Real people. The Tories lived with higher taxes and tax rates in Thatchers first term and the state this time is going to be worse.
There is a solution to this mess - its called 'pain'. And the 50p its not the old top rate which was reduced to 40p is above that. Welcome high rate earners to the world of pain.
You are seriously proposing a policy of lower taxes for the rich when the poor are going to be paying more?? Are you MAD?
And are you saying Tories are not going to rev up? The only way 50p will ever eventually change is with a Tory govt.
Ronnie Combo
April 22nd, 2009 10:04pm Report this commentThe country's only hope is that we all pledge to go out and buy as many scratch cards as we can and that any winnings are immediately given back to the government to help pay off the National Debt. Even if we don't win, the government will still benefit from the scratch card income. It's the least we can do, all things considered.
Johnathan Pearce
April 22nd, 2009 10:16pm Report this commentA shocker of a budget. Cameron and Osborne must not allow Brown or his henchmen to set the terms of debate. It is tragic that the lessons of the Lawson tax cuts of the 80s have been lost.
David
April 22nd, 2009 10:19pm Report this comment"It proves that, to get the rich to shoulder a greater share, you reduce the tax rate"
It does no such thing. It proves only that there is an optimum tax rate above which the tax take falls and below which it also falls. Stop misrepresenting the Laffer curve; it's a bell curve, not a straight line curve.
David
April 22nd, 2009 10:44pm Report this commenthttp://en.wikipedia.org/wiki/Laffer_Curve
Perhaps a picture will help.
CS
April 22nd, 2009 10:45pm Report this commentAnd I can forsee a week ahead of you arguing that they should walk right into those traps, Fraser.
lawrence greek
April 22nd, 2009 11:11pm Report this comment"the Tory base may wonder why it’s worth getting out to vote if the policies will be the same"
i just do not buy this argument at all. the ruination this government has wreaked is reason enough to get out and vote for the muppets rather than have a single day more labour...
THX1138
April 22nd, 2009 11:32pm Report this commentFraser I'm too angry with both parties to debate all your points but I agree about point 4 The 50p tax is a con.
Trust fund Boy George Osborne is pathetic I'm going to re-brand him Little Osborne after Daddies wallpaper business.
I should be reading that Tories will be overturning the 50% tax rate on day one.
Little Osborne should be saying that the 50% tax raises no money and is spiteful, vindictive to the wealth creating classes and is nothing but the politics of envy.
Little Osborne should be saying that Tories believe in low taxes in reality and not just rhetoric and this wasteful self defeating tax rise will go day one, not the empty weasel words from the useless Hammond "cannot be our priority" to reverse 50p rate" .
What possible use is a Tory Government that doesn't look after it's own a party that would sacrifice all the dearly fought principles of Thatcher & Lawson and common sense because Little Osborne is worried about being branded a "rich kid" by nasty Gordon Brown. Give me his iphone number and I'll have a word.
Alex Sabine
April 22nd, 2009 11:40pm Report this commentDavid, you're right in principle about the Laffer curve (although I would call it a 'revenue-maximising' rather than an 'optimum' tax rate - they are not necessarily the same thing!).
There is no hard-and-fast rule that says that cutting tax rates always increases revenue or vice versa. There are different Laffer curves for different taxes and in different countries.
It's hardly surprising that cutting the top tax rate from the penal levels of the 1970s increased revenue. That doesn't necessarily mean that cutting it from 40% to, say, 20% would have the same effect...
That said, a lot of dynamic tax analysis would suggest that 50% income tax is at, and maybe beyond, the revenue-maximising point - in which case this measure is mere gesture politics and should be opposed on that basis. If there is to be a clampdown on the rich, it should focus on reducing the opportunities for tax avoidance through the many anomalies, reliefs and wangles in our tax system and keeping rates down - not increasing the incentive to avoid (eg by converting income to capital) through high marginal rates.
In any event this is a mere distraction from the inadequate scale of fiscal tightening set out in this budget. Big direct and indirect tax increases on middle earners AND spending cuts are likely whoever wins the next election.
John Page
April 22nd, 2009 11:48pm Report this commentJudging by Newsnight, tomorrow's Mail has the best front page.
As usual, Vince was the outstanding speaker, whether you agree with him or not.
Adam
April 22nd, 2009 11:58pm Report this commentSt Vincent of Cable :P asked a very good question of Cooper on Newsnight, 'Why delay efficiency savings for a year? Is inefficiency just going to be tolerated now?' (not verbatim)
Anton Howes
April 23rd, 2009 12:34am Report this commentPerhaps the way for the Opposition party to get around cutting the 50% headline is to adopt the Liberal Democrat approach of cutting it from the bottom - i.e. increasing the tax allowance, and in this case also reinstating much of it for the higher rate? This may appease both richer and poorer voters.
Adam
April 23rd, 2009 12:34am Report this comment'real terms state spending in 2009/10 will rise by a juicy pre-election 5.5%'
HOLY COW!
Herbert Thornton
April 23rd, 2009 5:20am Report this commentThe Soviet Union's economy collapsed and all the signs are that Britain's is going to collapse too.
What will happen then? What do peopple say to these three possibilities -
1. General poverty and hardship combined with a Gadarene rush into an unholy alliance between Labour and Islam, inevitably followed by a complete Islamic takeover;
2. Election of the BNP to power & the expulsion of Islam from Britain; or
3. Conflict between the two leading rapidly to civil war.
David
April 23rd, 2009 7:05am Report this comment"That said, a lot of dynamic tax analysis would suggest that 50% income tax is at, and maybe beyond, the revenue-maximising point"
That I'm not arguing with, and indeed reckon the psychological impact from around 47% onwards makes this likely. But Fraser consistently misrepresents the Laffer curve, and it's annoying, undermining any argument he may be making about the tax rate.
Nick
April 23rd, 2009 7:32am Report this commentEvan Davis, on Radio 4's Today programme this morning (6.45), said, en passant, that the 50p higher rate tax band would raise "several billions".
TomTom
April 23rd, 2009 7:39am Report this commentDid he mention the increased burden of EU Contributions as a result of Blair's renowned negotiating skills ?
We are actually borrowing to pay the increased membership fee that Chirac inveigled Blair into paying
Guy Herbert
April 23rd, 2009 8:04am Report this commentHerbert Thornton,
Anyone who could take any of those cases seriously has more clearly lost touch with reality than the chancellor.
oldtimer
April 23rd, 2009 8:48am Report this commentUnusually for me, I switched on Sky News at c11.45pm last night to hear Kelvin Mckenzie in full cry about the budget, Brown and Darling. He was very good value. What was shocking, to me, was the apparent reluctance of the presenter, a younger lady than McKenzie, to accept the need for restraint or cuts in public spending. She gave the impression of having been thoroughly brainwashed on this issue. The People`s political editor, who did not demur from being described as a "socialist" by Mckenzie, was ready the give Darling the benefit of every doubt.
This was a small measure of the uphill task the Conservatives face in weaning the British voter off the "public spending is good, Tory cuts are bad" drug they have lived on for the past dozen years. There needs to be a painful cold turkey treatment for many years to cure this condition. It will be painful. Cameron and co will be unpopular - if they get the chance to administer the needed treatment. The alternative is the IMF.
No wonder the choose their words with care.
Nicholas Hallam
April 23rd, 2009 8:51am Report this commentThe Laffer Curve may well be a good model for the relationship between revenue and %age tax, but is NOT a bell curve - http://en.wikipedia.org/wiki/The_Bell_Curve
In the Laffer Curve the gradient is increasing in size as the curve approaches the x-axis. In the bell curve the gradient tends to zero. Furthermore, the Laffer curve is only symmetrical on the assumption that 50% is the optimum rate for government revenue - which, if true, would undermine Fraser's point.
Marc
April 23rd, 2009 9:55am Report this commentMaybe the answer to the 50% tax rate is to look at changing and making more effient the tax system. A flat tax at say 35% or 40% on all income, with a non tax band set at the earnings from a 40 hour week on the minimum wage (12K). Remove all the deductions that allow the top end to avoid tax. The cost of collecting tax should be reduced and the tax remains progressive due to the starting point. Simple fair and efficient. Of course defining income will be fun!
Ian Westbrook
April 23rd, 2009 11:32am Report this commentThe Brown stuff has really hit the fan now.
This Labour government has destroyed the independece of the civil service, the morale of the armed forces, the confidence of teachers and nurses - it was only a question of time until they finished the job of destroying this country by taking out the economy.
Mike Wood
April 23rd, 2009 12:55pm Report this commentNo more hard labour! Ten years is enough!
Aless Bieri
April 23rd, 2009 1:53pm Report this commentThe biggest Brownie in the budget has to be the denial that the government has introduced a 60% income tax band!
There's a piece about it with a graph here
http://www.aless.co.uk/2/darlings_tax.php
Herbert Thornton
April 24th, 2009 3:43am Report this commentGuy Herbert -
I don't dispute the possibility that the Chancellor has lost touch with reality - but is the Panglossian approach any better? Please tell us what you think is going to happen.
Rick Ardough
April 24th, 2009 11:45am Report this commentMy MD who is the major shareholder will raise his salary to maintain his " lifestyle " I am sure amongst this category of wealthy entrepreneur , this will be a common approach. This will generate tax income as Darling desires , however this will also shrink his Corporation Tax take. Net position
ceteris paribus tax collected, rises.
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