Some thoughts on the Coalition's first budget

George Osborne's budget today was commendably brief and unlike those of Gordon Brown seemingly straightforward. It was also not soporific as Alistair Darling's have been.

Whilst the BBC have been very keen to push the 'narrative' that the VAT rise to 20% is the most important feature, I was more struck by the re-indexing of pensions to salaries, the breaking of this link being something that the labour party decried when it was done but then spent 13 years not restoring. I was also struck by the balancing act that George Osborne performed over Capital Gains Tax, very carefully played indeed.

Of course the real meat of the budget is the debt reduction plan, without which the UK would be in severe trouble. Before discussing the planned reduction I think it most important that it is stated why we are in the mess that we are. The last labour government left power with the situation of the government spending nearly 25 per cent more than it receives in taxation. Labour claim that this deficit is due to the recession, it is not. People spend much time agonising as to how much of the deficit is due to the recession (cyclical) and how much would be there anyway (structural).
So when George Osborne talks about cutting the 'structural' deficit, you know that he is tackling the mess left behind by Gordon Brown not that caused by the recession. We have a structural deficit because Gordon ran budget deficits when the country was at the peak of the longest boom in its history. Gordon Brown set in place a spending system to spew money into public services instead of paying back old debts and storing up money for the bad times.


The changes to income tax thresholds are also important and I was impressed by the first move towards a £10,000 threshold for paying Income Tax. It is a ridiculous state of affairs that people pay Income Tax and then receive various Credits and Benefits back from the government. This state of affairs was engineered by Gordon Brown as part of his plan to make as many people as possible dependant on the government for part of their income, thus increasing the power of the State.

The changes to CGT and VAT will be attacked by the Labour party and the left wing press, including of course the BBC. However they should look at the recent OECD paper that showed that consumption taxes such as VAT have the least effect upon growth for the money they raise. The two taxes that have the largest negative effect on growth compared to the amount they raise are capital taxes (such as CGT) and corporate profit taxes (such as Corporation Tax). Between the two extremes comes Income tax.