UK Budgets - dull since 2003

Ever since Gordon Brown was Chancellor, now some 20 years ago (!!) Budgets have become a real tedious non-event.




Successive Chancellors have had seemingly little wiggle room since April 2003 when the introduction of tax credits totally gummed up the system. In 2015 the spending on tax credits reached £30 billion - a budget far more than almost any other Government department. Tax and Benefits (mainly pensions) rose to £125 billion.


Then, since the recession, the national debt has climbed and along with it our debt repayments up to a whopping £46 billion a year now - even with record low interest rates (the true next spend is around £33 billion, because the Bank of England owns a lot of the bonds and the interest the Govt owns therefore really goes to itself!).


These two spending items are what economists like to call structural spending. Whether the Government wants to or not, this spending will come out of the coffers. Many bits are tied to agreed laws and cannot really be altered, in the case of Government debt, we have to pay or else default.


This huge take of money from the budget, something like 6%, has come from nowhere. All the cuts made do not even finance it, hence we still have a 4% budget deficit and a big chunk of that is structural deficit which is why it is so hard to close.


Due to the above, successive Chancellors have been faced with the task of raising taxes to try to increase revenues to close the structural deficit or cut spending in other areas to allow room for these items to grow.


This is why we had the 10p tax budget, the pasty tax fiasco and the IR35 nonsense last year. All Chancellors are hamstrung by needing to further raise taxes, more if they want to reduce corporate tax etc.


Which is why all the spending in the budgets is so piddly, a billion on a road or ten billion over 20 years on a railway etc. There is no capacity for anything; unless your are Labour in which case you can add 10% to the national debt and spend away - but there is no evidence that ever works. If you look at USA and UK since the recession, we did austerity and they did Obama splurge. Both economies have grown about the same, but the US now has a much larger national debt - it was not worth it.


Interestingly Ireland and Iceland actually did full on cuts and real austerity for all and have recovered better overall now with economies in much better shape. As we said at the time, we would suffer long-term for the lack of political will to do the necessary back then.


So tomorrow we will get another spend nothing, gimmicky and fiddly budget - there is no alternative as long as the consensus to payout tax credits and increase the national debt remains in place for our political leaders.  Personally, I don't get why we do tax credits at all, subsidizing the low pay economy is the worst policy we have at the moment, amongst a bad lot - as it only seeks to further accelerate our transformation into a low wage economy.

Deficit not coming down when the sun is shining - no wonder Brexit is off the menu for Osborne

A long time ago, a phrase was used by the Leader of the Opposition, it went along the lines of

"You did not fix the roof when the sun was shining."

And it rang true, because at the time the Labour Government was busy increasing state spending. In 2000, having followed Tory budgets for the first term in office, total UK Government spending was £341 billion.

By 2005 and the second Labour General Election win, Spending had reached £492 billion. A massive 31% increase in state spending in just a five year period. No wonder the Government won the election easily even with the unpopular Iraq war as a key issue.

At the 2010 election, £693 billion was being spent by the Government. More than double what has been spent 10 years earlier in a time of relatively low inflation. However, with GDP growth quite high as a result of the bubble Government spend had only gone up by 4% of GDP so not great but not terrible...except....

e

The real issue had come in 2007, with all new fangled benefits galore to hand out, social spending in the Financial Crisis combined with a horrific loss of tax income saw Government spending saw to 50% of GDP. An the deficit and national debt soared with no money to pay for the 'automatic stabilisers.'

So to 2016, the Tory Government has seen a return to GDP growth and cut Government spending back down to 43% of GDP. The real damage though is in the tax base. There has been no recovery of the fake boom Banking tax take. Nor are there any signs it is coming back.

In April 2016 corporate tax receipts are lower than a year ago despite a growing economy. The tax won't come back. And because of that the deficit remains very high by historical standards at 4.4% of GDP.

With little appetite for tax cuts the roof is not fixed, the next recession is pretty close being at most 3 years away and possibly sooner with Brexit, there is no chance of the deficit being fixed in time. The sun has been shining but he damage was too great is what Osborne will argue.

But this alone makes me wonder about a Corbyn Government. By 2019 plenty of people will have forgotten the 2007 mess and who was at fault or not. When the Tories look vulnerable on the economy they generally lose the election. I wonder if it will come to pass.