Wednesday, March 21, 2007
Brown engineers a costless 'giveaway'
Posted by David Smith at 03:30 PM
Category:

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We were promised a ‘big’ budget in this morning’s papers and in many respects it was. A budget that cuts the main rates of income tax and corporation tax by 2p in the pound has to have something going for it though, as always with Gordon Brown, the devil was in the detail.

The one thing Brown could not afford, following Lord Turnbull’s comments about his Stalinist tendencies, was for his budget to sound like a Soviet-era planning tsar reeling off the tractor production figures. It says something about his style that for much of the speech, this was exactly what it sounded like. So was it a triumph or a damp squib?

Brown had four challenges. The first was to convince people that the successful macro economy of recent years is not guaranteed, and at the same time try to gain some credit for it. It is unusual for the economy to be going so well and the governing party to be falling further behind in the polls; even more so for the opposition to be ahead in public opinion on the key question of economic competence.

Will the 2p cut in income tax to 20p in the pound from April 2008 achieve this? Brown abolished his cherished 10p starting rate of income tax (introduced in 1997 with the specific aim of undercutting the Tories) to release most of the funds for the income tax cut. The alignment of income tax and National Insurance bands makes sense.

But the budget will make little difference to higher rate taxpayers - those with big cars will find themselves paying more in road tax and petrol. Others will find, as with the budget as a whole, that this is a chancellor that gives with one hand and takes away with the other.

In terms of the economics, the rise in inflation in recent months, while tarnishing the Brown record, may have had the useful effect for him of reminding people that there are still challenges out there. The Treasury, as is customary, predicts a return to the 2% target by the end of the year.

Otherwise, the overall economic picture was a good one for the chancellor to bow out on. There was no big embarrassing upward revision of his borrowing numbers, something that has characterised his recent budgets and pre-budget reports. The Treasury’s growth forecast, 2.75% to 3.25%, looks reasonable given the economy’s momentum. If it grows by 2.5% to 3% in 2008 and 2009 as the Treasury predicts, that would be a considerable achievement.

As inflation comes down – largely under the impact of lower utility bills – the economy should look better in a few months than it does now. The question of whether Labour under Brown gets any political credit for that remains open.

That is also true of the chancellor’s second challenge, to persuade voters that less can mean more when it comes to public spending. The Treasury’s number one priority over the past 18 months has been securing a credible slowdown in the growth of public spending, from nearly 5% a year in real terms in the six years to 2005-6 to 2% a year from 2008. The promise of something even lower, which was being briefed by the Treasury beforehand, did not transpire, though some of the spare cash for extra spending is coming from asset sales.

The budget numbers, giving the “envelope” for spending, are tight and delivering it will remain a problem. It pits the government against public sector workers, who face famine – in terms of pay and job numbers – after the years of feast. It also pits Brown against an electorate still a long way from being satisfied with the quality of public services.

The third challenge was on green issues. Brown’s aides claim that he has always been concerned about environmental matters. The budget has had a chapter on protecting the environment since as long ago as 2000 (ironically the year Brown caved in on fuel duties after the nationwide petrol protests).

This year’s task was to show he was backing up his concerns with hard action. Last weekend’s YouGov poll for The Sunday Times showed that despite widespread cynicism about all politicians on green issues, David Cameron is ahead of the chancellor.

Doubling air passenger duty in the December pre-budget report backfired politically. Today’s measures, which included a doubling of road tax for "gas guzzlers", the return of over-indexation of petrol duties from October and a range of other minor measures, were green-tinged but no more.

Finally, was it a ‘budget for business’? A couple of weeks ago business pleaded for a cut in corporation tax more in hope than expectation. But the mood changed, hence George Osborne’s clever pre-emptive strike of pledging a 3p cut in the main rate of corporation tax (currently 30p in the pound) paid for by abolishing some significant tax reliefs.

Business got what it wanted - a cut in the main rate of corporation tax from 30% to 28% from April 2008, paid for by "simplifying" some alloances and reliefs. Paid for too by increasing the small companies' tax rate from 20% to 22%. That, under the guise of cutting tax avoidance, looks strange, not least when income tax is coming down to 20%. The small business lobby, understandably, is up in arms. This was a Robin Hood tax move in reverse.

As always, business – and the rest of us – will be studying the small print closely. This chancellor is like one of those people you shake hands with only to discover a couple of days later you are missing a couple of fingers. Watch this space.

And my verdict on the budget? Certainly not a damp squib but also no giveaway package. Quite a lot of smoke and mirrors, in fact, and quite a lot of spin.

From Times Online

Comments

Dear David,
Like the way you mentioned the counting of the fingers after shaking hands with Mr Brown.

Unfortunately Mr Brown has been shaking our hands and those of future generations quite incessantly for the last 3 or 4 budgets.

I am no fan of MR Brown and never was. He will go down in history as the man that manipulated the treasury the BOE and as the freat appeasing saviour to the city. He may have created 10 years of unabated economic growth for UKplc(but this is mostly paper growth) but will ultimately will be remembered for the even longer period that will follow (as in Japan before) of deflation and monetary devaluation. As I have mentioned to you on several occasions this chap was Greenspan's understudy.
And we all know that nobody ever got ahead by copying american Fed Policies. I still remember during the '97 General Election campaign, the Tories were putting Posters up about Blair and Brown with horns like devils.........and thought it then slighly OTT. Fast forward 10 years and see how bl..dy right they were!!

Best wishes to all,

Arik Schickendantz

P.S. Gordon giveth...and Gordon taketh.....always in that order, what is ultimately not his....but yours and mine!!

Posted by: ariks schickendantz at March 22, 2007 12:22 AM

One thing is for sure, New Labour, and Brown, no longer have history on their side. The history of hatred of the Tory party; the history of wild swings in the economy; 10 years of New Labour history - good and bad. It will be a challenge, not an insumorntable challenge, to manage 10 years of history.

Posted by: Ash at March 22, 2007 10:23 AM

Anyone who thinks that Gordon Brown is honest, consistent or competent should consider this example.

When Gordon Brown introduced the 10p starting rate of tax he said that he did it because it would halve the income tax paid by two million people - two million of the worst paid. Some of us asked at the time whether it was just a gimmick because he could have done it in a simpler and more efficient way just by raising the income tax threshold.

He now thinks that it is appropriate to double the income tax paid by those same two million people.

Why? because it allows him to wrongfoot his opponents - and to hell with the two million people he previously claimed he wanted to help.

Incompetence and dishonesty are the only expanations I can think of. Can anybody offer an alternative explanation?

Posted by: HJHJ at March 22, 2007 11:23 AM

Controlling inflationary pressure through manipulation of interest rates may sound stanilistic.However, it feels to me more like a consumer protection organisation in a fine velvet suit.

The substance in free trade does not allow any instituition to set market rates except give recomendations for it and this includes the MPC.It has indeed been a lucky period for the Bank that economy has favoured its policy and hence the good performance since its inception.While you control the financial markets and there is an oversupply of funds in the economy the actions of the MPC can be minimalistic.The banking sector makes its money, however through investing cheap money accessed by the stability of the GBP.

For these reasons and many more, the successful macro-economy can not be guaranteed and we just have to wait and see what happens when the USA economy encounters a recession and the Japanese economy goes into a boom cycle.

Posted by: Hitesh Damani at March 23, 2007 11:46 AM