- Change in stamp duty is welcome. But by biasing it so heavily on the wealthy it smells like another ‘soak the rich’ attack. Remember Kant’s maxim that we should treat everyone as an end in themselves, not a means to an end. Increasing the personal allowance from 2015 to £10,600 further narrows the tax base and increases the percentage of voters who don’t have skin in the game.
- Supply-side reforms are all welcome. Helping bring science into the commercial world, funding for post-graduate study and lowering the cost of apprentice training will help address our skills shortage. Roads are also welcome…but has many have commentated, haven’t we heard this announcement before?
- The obligatory fluffy policies? Another £2 billion on the NHS and taxation changes on multinationals. Tempting to see these as policies to appease voters ahead of next year’s election. The long term NHS funding problem requires acceleration of competition in the supply of services, while the UK’s position on corporate tax for multinationals remains highly ambiguous. How can you boat of being a ‘competitive’ tax environment and then squeal when other countries are still more competitive?
The long view
George Osborne continues to do a believable job in presenting the government as guardians of sound fiscal policy. Despite offering increases in public spending in certain areas, which can be seen as trinkets ahead of next year’s election, he continues to talk of eliminating the structural deficit by 2017-18 and remains committed to his plan.
- However the plan continues to run behind schedule. The country’s £1.4 trillion total debt (around 80% of GDP) will rise by £91 billion this year, certainly this is less than the £97 billion increase seen in 2013-14, but the reduction seen this year is half what was hoped for in January.
The budget deficit of around 4.5% is the second highest in the developed world (Spain is at 5.7%).
- To eliminate the deficit, and so halt the increase in total debt, Osborne is relying on two tools which carry with them their own problems:
- Economic growth, to boost tax receipts and cut welfare payments. The lamentably weak rise in tax receipts, despite strong growth and falling unemployment, suggests to some economists that the economic growth is becoming increasingly dependent on low wage, part time jobs, which in turn reflects a lack of skilled labour. The OBR have warned that the output gap in the UK is smaller than previously thought, meaning that the long term GDP growth rate is probably well below the current 3%.
- Cuts in public spending. He has promised not to raise tax further, which can only mean spending will be reduced. This could make austerity more politically charged than it has been so far. Much of the reduction in spending to date has been achieved through cancelling planned capital spending, which is politically easy. Few miss a road or hospital that hasn’t been built. But with road building schemes back in favour, and few planned capital projects left to cut, the axe must fall on current spending. As the wage bill for the public sector is attacked, there maybe a negative impact on GDP growth as household demand weakens, and almost certainly more noise from public sector workers.