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The Brown Government is still in a recovery, not a pre-election, stance. What
we heard yesterday from Alistair Darling was a holding operation, modest in
its rhetoric, scope and consequences. His strategy rests on the hope — a
pretty optimistic one — that the slowdown will be neither severe nor
long-lasting. As so often, virtue, in terms of improving public finances, is
not now, but at least a year away.
The Budget Red Book suggests that we face several years of belt-tightening.
Not only is public spending growth due to slow sharply to an average of 2.2
per cent in real terms for the next three years, but — in perhaps Mr
Darling’s most important remark — the assumption is that it will continue to
grow after 2011 at a rate of 1.9 per cent a year. So there will be no
loosening of controls on spending or public sector pay. The Tories have
pledged to match Labour’s plans up to 2011, but George Osborne was
non-committal about their plans after that.
However, consumers should not expect better times either. Household spending
is expected to be sluggish this year, and thereafter to expand much more
slowly than in recent years.
The Budget itself has attracted most attention for the increases in duties on
alcohol and petrol-guzzling cars to finance the initiative on child poverty
and help for pensioners: a mixture of puritanism (sin taxes) balanced by
modest social democratic moves to alleviate child and pensioner poverty. And
Mr Darling sought to rebuild bridges with the City and business after a
bruising few months. The CBI, which has been very critical recently,
admitted, with relief, that there were no new shocks.
But no Budget should be viewed in isolation. Yesterday’s should be seen as the
third, and not the most important, part of a series of announcements:
starting with Gordon Brown’s last Budget a year ago and continuing with Mr
Darling’s ill-fated Pre-Budget Report (PBR) in October, with its proposal on
non-domiciles and capital gains tax.
Yesterday’s announcements involve much smaller total tax changes than the
earlier measures: the transferable inheritance tax allowances in the PBR,
and the big income tax changes announced a year ago to come into effect next
month (removing the lower starting rate and cutting the basic rate of income
tax).
For the following two years, yesterday’s increases in duty, in combination
with the Pre-Budget changes, will boost the tax burden by £1.1 billion and
£2.8 billion respectively, largely offsetting the tax cuts announced a year
ago. This will reinforce the widespread, and often justified, impression
that Chancellors take back with one hand what they have given away (of our
money, that is) with another. The relative share of taxes of national income
is due to continue to rise from 36.8 per cent to 37.4 per cent by the start
of the next decade, the highest for 20 years, compared with a recent low of
35 per cent.
What matters is not just the level of taxes but the widespread sense
registered in polls that the big increase in spending of recent years has
not produced an equivalent improvement in service standards.
Mr Darling’s line was that Britain was better placed than other countries to
withstand the slowdown thanks to structural reforms since 1997 (as well as
those, he did not mention, of the Thatcherite years). Many outside
economists are more pessimistic about the outlook. This obviously has a big
bearing on the public finances.
David Cameron argued, in one of his most effective Commons performances, that
Britain’s public finances are less healthy than in many other countries
because of earlier fiscal laxity. In attacking the Government’s failure to
prepare for the slowdown — “in the years of plenty they put nothing aside” —
he sought to shift the blame from Mr Darling to his inheritance from Mr
Brown.
Public borrowing for each of the next four years is higher than forecast last
October, by £7 billion in 2008-09 alone. Some of this is allowing the normal
pressures of a downturn to work through with lower tax receipts, notably
from stamp duty and property taxes, pushing up borrowing. But even adjusting
for these cyclical factors, borrowing is higher than previously estimated
and only due to decline modestly from next year onwards. Yesterday only
amounted to a small start to the adjustments necessary to get public
finances back on the right course. Public debt is due to bump along
perilously near the upper limit of the Treasury’s golden rule.
So, even on Mr Darling’s forecasts, there will be little room for manoeuvre
next year, and there are big risks if the slowdown is worse and recovery is
delayed longer than expected.
The immediate pain from yesterday’s tax-increasing measures will no doubt be
unpopular, but this will be less significant in the longer term — that is,
in electoral calculations — than the state of the economy. The Budget may
not have been inspiring, but it represented the Government’s best, or
least-worst, case scenario.
Buzzwords
Brown 2007
Investment 35
(Tax) credit 16
Family 18
Education 14
Environment 18
Carbon 14
NHS 3
Security 5
Inflation 10
Employment 15
Incentive 10
Saving 12
Darling 2008
Investment 24
(Tax) credit 4
Family 15
Education 5
Environment 10
Carbon 26
NHS 0
Security 1
Inflation 18
Employment 8
Incentive 6
Saving 7
New words
Northern Rock 1
Global/World economic slowdown/downturn 5
Nondomiciled 1
Long and short of it
— Mr Darling used the traditional battered red dispatch box first used by
William Gladstone in the 1860s. Only James Callaghan and Gordon Brown have
broken the protocol
— The speech lasted 50 minutes, shorter than any given by Gordon Brown.
According to Hansard, Mr Brown’s average speech length was 58 minutes
and 38 seconds
— Gladstone gave the longest unbroken speech, in 1853, at 4 hours and 45
minutes. Benjamin Disraeli gave the shortest speech, in 1867, at 45 minutes
— The Chancellor is alone in the House in being allowed to drink alcohol when
giving his Budget speech. Mr Darling opted for water
— Gordon Brown delivered 11 Budget speeches, the most by a Chancellor in the
past 100 years
— Iain Macleod is the only Chancellor since 1900 not to have delivered a
Budget. He died on July 20, 1970, a month after being appointed
— In 1947 Hugh Dalton had to resign as Chancellor after leaking the contents
of the Budget to the Evening Standard newspaper
Source: Times database
