Thursday 24 March 2011

The Budget - Much Ado about Nothing?

Another budget and lots of newsprint and heated debated on the airwaves.  But has this budget made any significant difference to the economy or the short term prospects of most individuals?  I suspect not.  In a way I feel a bit sorry for our boy George, (well not really), as he has to present a budget each year, but all the key decisions were taken last year.  This was when the Coalition make their reckless and ruthless decisions on the future direction of the public finances.  And despite the fanfare this year about a budget for growth, this is clearly no such thing.  
For the overall strategy of the Coalition is much less a dash for growth than a dash to cut.  To cut just about anything and everything.  If the Chancellor was serious about growth in the economy he would not be aiming to cut the deficit in four years, nor would he be slashing back on public spending.  It is already clear that there has been even less growth than forecast and the prospects for next year are none too good either.  To cap it all government borrowing has actually gone up.  Nothing too surprising in any of this.  Before the last election just about everyone warned that a too precipitous dash to cut the deficit would not just damage the lives of individuals, but would damage the prospects for future growth in the economy.  Even the Liberal Democrats criticized the Tories for their economic policies and warned that this approach would damage the economy.
The Coalition’s decision to cut the deficit in as short a time as possible has nothing to do with economic analysis.  All the evidence shows that slashing public spending in a crisis will not, on its own, lead to growth.  The Tories are using the deficit as a red herring to cover their real aim - which is to slash public spending in overall terms and welfare spending and public services in particular.  All this is classic Tory policy - the nasty party has not changed its spots.  There is nothing surprising in any of this, the public knew what the Tories stood for and what they were proposing to do.  Which is why they were massively rejected by the electorate at the last election.  It is always important to remind ourselves that the Tories did not win the election.  If the country had wanted the Tory prescription, more of the electorate would have voted Tory.  But they didn’t. 
What is really surprising is that the LibDems have ended up supporting this nasty lot.  Especially since the LibDems campaigned strongly against the economic policies of the Tories.  So why did they decide to enter into a Coalition?  I know that some LibDems are as neoliberal in their economics as the Tories, but most of us assumed that there were enough LibDems with a Social Democratic background to resist the blandishments of office.  Oh how wrong we were.  A clear lesson from the last UK election - never trust a LibDem.  With the Tories at least you know what you will get - though it always seems to turn out even worse.
Back to the budget.  There is nothing in this year’s budget which will change the country’s economic prospects.   Taken as a whole the various budgets mean a pronounced reduction in the living standards for the majority of us.  With inflation at 5% or so, future rises in personal allowances to be limited to the CPI as opposed to the RPI, rises in VAT, cuts to public services - minor adjustments here and there make little difference to the loss of income for most of us.  Even the 1p reduction in the price of petrol is a bit of a con.  Its very minor effect is more than offset by the earlier rise in VAT.  Not to mention that the North Sea oil industry is up in arms about the rise in its tax burden - all to pay for this 1p reduction in the price of petrol.  The after effects of this imposition on the oil industry will be very interesting.  Will they carry out their thinly veiled threats to cut back in investments in the North Sea?  If so the government will look pretty silly, and all for a mere 1p reduction in the price of petrol.  Of course if they do not cut back on investment and there are no job losses, this would be a pretty good indication that there was no need to reduce corporation tax.  This minor move in the budget could prove to be the most interesting of all.
A final comment on the overall economic strategy of the Coalition. Just after the budget two of the main ratings agencies have made public their concern that the low growth forecasts for the UK mean that the government could in the future be faced with a downgrading of its AAA rating.  What would that do to the government’s borrowings?  Plan B anyone?

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