VAT rise was not 'unavoidable'
- The Chancellor has lanced the boil of the fiscal crisis. Britain’s AAA rating is safe
- But he has done more than necessary to meet his fiscal target, so the VAT rise was ‘avoidable’
- George Osborne’s new fiscal mandate has curious echoes of Gordon Brown’s old one
- And the Budget overstates the progressivity / fairness of today’s measures
Two years after the crisis: the bill has arrived. And we are all paying. Everybody from the teenager on housing benefit to the public sector worker to the banker cashing in his bonus.
The Treasury reckons in April 2012 we’ll be on average about £400 a year worse off as a result of all these measures. That ranges from £200 worse off for the poorest tenth, and £1,600 for the richest tenth.
Another way to look at this: how much we’ll lose as a percentage of our incomes – from the poorest 10 per cent of the population to the richest 10 per cent. The top 20 per cent of the country, those earning above £38,400 do lose the most as a share of their income – so that’s progressive. But it’s the bottom 10 per cent – the poorest people in the UK, earning below £14,200, who are the next biggest losers, on the Treasury’s own figures.
A big health warning on this: These are the Treasury’s own numbers, an attempt to self-assess winners and losers, or here losers and losers. They have chosen a flattering year in April 2012, before many of the most acute welfare cuts kick in.
Perhaps bizarrely, it includes many preannounced Labour policies, such as national insurance rises, that clobbered the rich. Strip them out and the actual impact of today’s new policy will be even less progressive, maybe not at all progressive.
I know that some senior Osborne allies were joking today that the Institute for Fiscal Studies had been put out of a job. However, I’d wait until tomorrow before concluding that today’s numbers are “progressive” or “fair”.
As I pointed out last week, the apparent impact of its budget on the economy makes difficult reading for the coalition. The independent Office for Budget Responsibility forecast just a week ago that economic growth over the next five years would be 2.6 per cent in 2011, then 2.8 per cent, 2.8 per cent and 2.6 per cent.
The OBR, after the budget now says the economy is forecast to growth will be slower this year and next and then faster thereafter. Slower growth brings higher unemployment. The claimant count is 100,000 higher at the end of next year, and stays higher throughout the next five years.
In his speech the chancellor cautioned against direct comparisons like this. Nonetheless they illuminate the big risk for him: that austerity itself could hamper the recovery. It’s worth noting that when Japan in the mid-1990s tried to halve the deficit partly through raising VAT, it ended up doubling the deficit by killing growth.
However this was pain for a purpose, and the chancellor will be heartened by the warm reception today from credit rating agencies and the OECD as record levels of government borrowing drop.
Essentially the £73bn fiscal consolidation planned by Labour for 2015 has been super-sized by £40bn by George Osborne. Of that £40bn, £8bn comes from higher taxes, which is the VAT minus some tax giveaways. Of the £32bn in cuts that remain, a third or £11bn is from the axe to the benefit system. The OBR has indicated £17bn more in departmental cuts by 2015.
In unprotected areas such as housing, business, transport and universities that will mean a 25 per cent cut over four years, which means an enormous 30 per cent in some departments, all from current spending. Bigger than Thatcher, bigger than the IMF-led retrenchment.
Yet even this hasn’t solved the deficit.
Labour expected the deficit at a mammoth £163bn this year falling to £74bn at the end of the parliament. The coalition cuts into that in every year halving the previously forecast deficit to £37bn by 2015. In total, Britain will borrow £115bn less over the next five years, but we’ll still have a deficit.
Mr Osborne says we’ll actually be in surplus on our current budget – that’s all spending APART from capital expenditure on things like roads and housing.
That is the chancellor’s own target: which has echoes, shall we say, of Gordon Brown’s famous Golden Rule that we can “borrow to invest”. Treasury sources point out an important difference that it will be “forward-looking rather than backward-looking”.
Most important, the chancellor over achieves the target, the fiscal mandate that he set for himself, by one year. The chancellor did not have to raise VAT to hit the target. He has raised it to fund council tax freezes, corporation tax cuts, and the Lib Dem fairness agenda. (And perhaps a tax on consumer spending is part of the great rebalancing of the British economy).
However, if all goes to plan, that would leave Mr Osborne £10bn wriggle room in 2015.
The Treasury would call that “caution”. Some might see it as a pre-election warchest.
There are 10 comments on this post
Hi Faisal,
The ultimate sacred cow appears to be raising the basic rate of income tax and I don’t understand why…
I’ve just watched Krish’s “Dispatches” programme on cutting the deficit, which didn’t look at the idea, nor was it considered in a similar show hosted by Jon prior to the election.
Obviously, Brown did raise income tax for high earners – and low earners, with the removal of the 10% band – but it seems ridiculous not to look at raising general income tax, especially when the alternative is cutting public sector jobs and services, risking a double-dip recession.
Indeed, Brown cut basic income tax by 3p during his time as Chancellor; I wonder what impact reversing this would have? Also, did that cut contribute to the deficit (instead of building up a surplus during the boom)?
Finally, how much would be raised by removing the cap on National Insurance for high earners?
I hope you’ll consider looking at these questions.
Thanks and best wishes,
John
Excellent article, backing up an equally excellent analysis on last night’s programme. Hope you’ll be keeping an eye on actual vs forecast rates of unemployment for us – watch out for institutionally convenient redefinitions of “unemployed” for the next few years!
“Excellent article, backing up an equally excellent analysis on last night’s programme”
Yes, thank you, Faisal, for your sterling work, particularly of late. I rely on you to explain it all to me!
I not sure I agree. The UK had to cut job-creating taxes on businesses to stay competitive with low-cost countries to the East. Only an increase in consumption taxes ie VAT could pay for this. This site http://www.tmf-vat.com said we had the lowest VAT rate in the EU after Luxembourg and Cyprus – so unavoidable? Yes.
Dave
One aspect they completely overlooked was to implement a smaller VAT rise for most items (e.g. maybe 1%) but to introduce a luxury VAT bad as a significantly higher rate (e.g. 25%+). This would have had a lower impact on those less well off (who maybe cannot afford Blu Ray players, HD TVs, 18mp Digital SLRs, etc.).
Had they wanted to lessen the impact on the 10% worst of in society they could easily have done so. Maybe it is the nature of the Conservatives that they care less about this group and the nature of the Liberals that they seek power more than fairness.
PS: Sorry, I forgot to ask: how much would be saved by scrapping higher rate tax relief on pension contributions?
Also, the TUC mentions a £100 BILLION (!!!) black hole of corporate and private tax evasion – is that true?
But is it right that politicians should aim to serve “the markets”, which can be a capricious master (and also have a habit of creating their own realities) rather than the needs of their own populations? See my recent blog post: http://www.qfinance.com/blogs/ian-fraser/2010/06/15/europes-rush-to-impose-austerity-measures-could-prove-disastrous . I agree that Labour’s cavalier spending had to be reined in – Simon Jenkins is good on this point – but Osborne may be crossing a bridge too far with his goal of slashing public spending by one-quarter by 2015?
Why are we trumpeting about Rating Agencies? In his Snowblog, Wednesday 9th December 2009-Jon rightly states that it is “Time to call a halt to ratings agencies”. He rightly states that ” these are the very folks, working for “reputable” ratings agencies who accord Lehman Brothers and the massive AIG, RBS, HBOS and the rest, “triple A” ratings shortly before they all went bust. Why should we give any credence to their submission? They are all sleazy.
On other side of the pond many states’ attorneys are suing rating agencies. Connecticut’s attorney general sued Moody’s Investors Service and Standard & Poor. Violated public trust – Richard Blumenthal.
Credit rating agencies who were suppose to be a watchdog for the mortgage market, there role in collapse of Financial Market, should not be understated. Triple A ratings were given under pressure from banks and other institutions to earn large fees and not on merit or soundness of the corporations.
[...] in both the areas that I critiqued in last night’s C4 News, and blog, the IFS seems to contradict the Budget [...]
[...] ‘regressive’ tax; and Will Straw at Left Foot Forward says that the rise is “avoidable”, as does Faisal Islam at Snowblog. Tim Montegomerie over at ConservativeHome is also in agreement that the [...]