The Budget aftermath

From listening/watching/reading the BBC's post Budget coverage you would expect the Country to be in a state of rage. However the first post-budget opinion poll (reported in The Sun) shows that 57% of those polled thought the Budget was right for the Country and 43% think that George Osborne was doing a good job. Just remind me what was Gordon Brown's approval rating in April?

The BBC are pushing the Labour narrative for all they are worth, the Conservatives need to lance that festering boil.

Cuts or not?

Burning Our Money explains the old fallacy about cuts.

'So the cuts are going to be long and deep, which nobody can deny.

Well, nobody that is, except extremely naive people who simply look at the government's spending projections. People like John Redwood, who at the TPA's budget briefing today, drew attention to the plain fact that under the Osborne plan, total public spending is not facing any cut at all. In fact, it is projected to increase from £697bn this year to £758bn in 2015-16, a rise of 9%.

...

when we look at today's spending plans in those simple old naive cash terms we find the following:

1. Departmental spending on current services (including all those doctors and nurses etc) is planned to be roughly unchanged over the next 5 years
2. Departmental spending on capital projects is planned to fall by £13bn pa (23%) - the entire cut decreed by Darling
3. Annually Managed Expenditure (largely welfare) is projected to increase by £74bn (23%)

So apart from capital spending, where are those cuts?

The fact is that when people speak of cuts, what they're usually talking about is the cash spending plan deflated by the projected increase in average prices across the economy (GDP deflator). As noted above, total cash spending is projected to increase by 9%. But with average prices forecast to increase by 13%, the inference is that real spending is planned to be cut by 4%, with much bigger cuts for many individual programmes.

But what if the price of the stuff the public sector buys increases by less than 13%? Sure, we know that for most of the last 13 years, the price of public purchases (including labour) has increased much faster than average economy-wide prices, but that's not an immutable law.

If through a mix of pay freezes/cuts and contract renegotiation the price of government purchases could be held down, then suddenly the "cuts" start to disappear. Indeed, if the price increase could be held below 9% over the 5 years, then overall public spending in real terms doesn't get cut at all.'

I wonder if the BBC will allow this sort of narrative to affect their Budget attacks.

The Labour party and the rise in VAT

I presume that the Labour party will publicly commit itself to reversing the rise in VAT to 20% as soon as they are elected to power. If not then all the whining about unfairness is just hot air.

The Emergency Budget - some alternative views

1. Chris Stokel-Walker has some ideas regarding how 'To stick it to George Osborne'. It's a great piece, here's a few extracts:

'There are some strange anomalies in the food VAT system. Were I to buy a live horse (as my girlfriend would want me to – though presumably not to kill and eat later) I would have to pay the standard rate of VAT. If, though, a friendly farmer has already saved me the bother of killing it (I’m really really sorry – you know I would only buy live horses to give to you), then I can have a whole dead horse – or horse cutlets – vacpacked and sold to me as exotic meat, VAT-free. Why? Live horses aren’t considered a recognised food species. Dead horses, presumably, are.

...

Monkey nuts (peanuts in their shells) fall under the zero rate; the second you remove the horrible outer shell, they become KP nuts (or some other equally popular brand) and you have to pay VAT. It’s not even the roasting or salting that makes the difference – it’s the shell. Honest.

...

If you pop into your local bakery from today, eye up those gingerbread men with caution. If their little toes have been dipped in chocolate (because gingerbread men’s feet would get blisters if they had to walk without shoes), then the government has ruled them to be too extravagant. They’re parading around in their chocolate boots, while your average Tom, Dick or Harry Gingerbread has to make do with a pittance. ‘Gingerbread men decorated with chocolate’ come under the standard rate of VAT, ‘unless this amounts to no more than a couple of dots for eyes’. Bakers of Britain: let your gingerbread men and women run naked, free like pre-Lapsarian Adam and Eve! We’ll have no fancy winklepickers, thank you: this is austerity Britain.

...

Millionaire’s Shortbread is zero-rated while plebian chocolate-covered shortbread is taxed at the full rate. I don’t think I need to explain why that one is funny.'

2. Mr Eugenides has the killer phrase: 'Vince Cable looks like he's swallowed a shit-flavoured landmine.' Indeed he did.

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.

The pain starts today

But will George Osborne be brave enough to do what Labour, the Unions and the BBC have set their minds and words against? Burning Our Money has a good piece on this.

George Osborne or the World Cup?

I note that the time of the Emergency Budget has been moved forward from 15:30 to 12:30 next Tuesday. I wonder if George Osborne was worried about being overshadowed by Mexico vs. Uruguay and France vs. South Africa...

Now the BBC's budget coverage complete with ritualised shrieking about 'Tory slashing cuts' will only be able to be at full volume for less than 2 hours, so maybe a smart decision by George Osborne.