Tuesday 22 June 2010

Instant Budget Reaction

The joy of the Internet is that news is everywhere and instant these days. No doubt there are thousands of pages of analysis of the budget already; and this all adds to the ability of people to see the truth.

George Osborne, whom we at this blog have long found fault with, decided today was the day to go the extra mile. tax cuts and budget cuts, with some rises and the start of an attack on the bloated costs of the UK Public Sector. Overall the right plan, but the really there was poor execution:

1. The VAT rise - This money was used to bolster cutting personal taxes and not cutting the CGT rate. However it is highly inflationary and will surely force the Bank of England to move sooner to raise interest rates. Higher interest rates are a death knell to the hugely indebted UK companies and consumers.

2. He maintained the ring-fence on NHS and Foreign Aid - this was not the year to have anything left out. All must be scrutinised and savings found.

3. Bank Levy - Labour, bizarrely, is correct. Until there is international agreement there will be capital outflows because of this. To Ireland is the plan in the Banks in the City. They are not going to leave precious capital in the arms of HMRC. Daft.

It is not a bad budget and a far better effort than anything the Labour Party could come up with. It is delivered with a healthy view of reality not the delusions of those in the Bunker. It is a big step forward, but more risky than it needed to be. Other savings could have been made and taxes not raised in such an inflationary matter. Time may yet be a harsh judge.


Bill Quango MP said...

Agree re inflation. He is going to have to move up the government targets on inflation or raise interest rates. Probably both.

Old BE said...

Surely "inflationary" would imply that prices will carry on rising. A one-off rise isn't the same as inflation, IMHO. If the price of oil (for example) goes up and then stops rising, does that need a rate rise too?

Steven_L said...

It was soft, I was expecting to see loads of departmental budgets slashed.

Local government just frozen (although 10% on landfill tax is effectively a cut). BIS frozen, a tinsy little snip at the Home Office and DECC and that was about it!

Lots and lots of stealth shavings here and there. Oh, and a hefty dose of optimistic forecasting.

Did you see the pilot for fuel dity discounts in Scotland? Well, they've got to do something to make up for the poll tax I guess.

Was 10x more wishy washy than I expected.

Old BE said...

Also, a rise in VAT actually reduces consumer spending, so could arguably be deflationary.

Nick Drew said...

I was expecting to see loads of departmental budgets slashed

come on Steven, he said he'd increase the Lab cuts (£44 bn) to £61 bn cuts

= 25% in non-ring-fenced departments

for some reason no-one is talking about this (yet)

Steven_L said...

I'm confused Nick, the table 2.2 sets out the 2010/11 plans for departmental budgets and there are hardly any YOY cuts.

For example CLG 2009/10 = 25.5, 2010/11 = 26!

CLG Communities 2009/10 = 4.3, 2010/11 = 3.8.

That's a YOY freeze isn't it?

Bill Quango MP said...

BE: A reduction in consumer spending doesn't do anything to VAT unless there is discounting.
There isn't much room for discounting as inventories are still very low.

Nick Drew said...

SL - I only know what that nice Mr Osborne told me :+)

hovis said...

OK better than Labour, but thats rather like saying rotten cheese is better than a dog turd.

Totally agree why ringfence NHS, foreign aid? NHS is a cancer on society, poor health outcomes, massive fraud and huge waste of resources controlled by producer interest groups. Also why restrict tax credits? simply abolish them and their intrusive civil service support structure and save £ in the long term and reduce intrusion.

Tim Worstall said...

"Bank Levy - Labour, bizarrely, is correct. Until there is international agreement there will be capital outflows because of this. To Ireland is the plan in the Banks in the City. They are not going to leave precious capital in the arms of HMRC. Daft."

shouldn't they read the proposal first?

It's a tax on liabilities...upon gearing. Tier 1 capital is specifically excluded from the levy.

Jonathan said...

Raising VAT will cause a bump in inflation but the massive cuts in public spending will be deflationary and balance this out?

Are we not seeing a return to more traditional Tory monetarism - lower public spenidng and low IRs leading to a market allocation of capital - as opposed to Labour's neoKeynesian low private sector lending and high government directed public spending.

The question is which is the more efficient method for growing the economy over the medium term.

Overall an OK budget but alot of it felt like tinkering with levels rather than massive reform of the tax and spend system.

Marchamont Needham said...

The 21k public sector pay freeze cutoff is clever. Means over 20% of the public sector workforce have no incentive to vote for strike action.

Divide and rule!

CityUnslicker said...

Tim W - http://ftalphaville.ft.com/blog/2010/06/22/268346/the-bank-friendly-chancellor/#comments

Tim, the gearing will be done by non-UK based bank entities - SPV's and the like. Then the UK businesses won't have to pay the tax. it will require a nice bit of finessing and so no doubt the tax accountants are dancing about as I write.

CityUnslicker said...

Marchamount - oh, there will be strikes with 25% cuts coming, you can't get all of that without staff going.

Kicking public sector pensions into the long-grass was a missed opportunity too.

Steven_L said...

Where is everyone getting the 25% cuts figure from - read it - there aren't any 25% cuts (except maybe to tax credits).

Philipa said...

I think the ring-fencing was a mistake - to take from the mouths of our own babes to give to another countries children is just wrong.

Anonymous said...

Good budget by George, pensions and a pension levy in the next budget

James Higham said...

Instant reaction - disappointment?

Budgie said...

Philipa - you are right. Abolish DfID. Use the FCO to distribute aid only for catastrophes.