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|Not much for workers, not much for business|
The Times - March 22nd 2012
Chancellors of the Exchequer seem to take an oath when they enter office that they will henceforward ensure that the words “iron” and “reforming” become attached to their titles. So we had better test George Osborne for those qualities, giving him high marks for the first and a more middling score on the second. First, though, there are two other oaths that chancellors really ought to take and be tested on: the Hippocratic and the Hyperbolic.
The Hippocratic is the simplest and yet the hardest for any chancellor to meet: first, do no harm. Gordon Brown, iron though he did at first seem, was the worst culprit at this. Given an annual chance to hog the dispatch box he could never resist behaving like Santa in the Harrods grotto, handing out tacky gifts to every child he could see, which ended up either breaking on the way home or causing some, ahem, unfortunate complications.
Mr Osborne was, at least, a more temperate and less generous Santa, though could not resist the role altogether. For a “simplifying” budget to include an extended film tax credit designed mainly to allow him to use the phrase “Wallace and Gromit”, or capital allowances in more enterprise zones and boosts for wifi and superfast broadband that were designed mainly to allow him to list all sorts of politically deserving cities and regions, is, well, a bit of a complication.
Hyperbole is just as hard to avoid, for budgets are every chancellor’s Big Moment. So I suppose he had to say that his was a budget that “unashamedly rewards work…backs business…backs aspiration”, that it was going to make Britain “Europe’s technology hub”, that the government has set an ambition to double Britain’s exports during this decade, and so on. After all, the government is said to be in need of a growth strategy.
The trouble is that growth strategies and iron chancellors do not fit well together. The reality is that this budget did not really “reward work” and it lacks the resources to do much either for business or for exports.
The main thing the budget did was to hold fast to Mr Osborne’s fiscal consolidation plan, and to say that we would have to carry on grinning and bearing it through the next 12 months of at best anaemic economic growth, forecast by the Office for Budget Responsibility to be just 0.8%, compared with the 2.5% the OBR predicted after his 2011 budget.
That is better than a new recession, which is what our main markets in the eurozone are having, and the fact that our public debt will peak at 76.3% of GDP instead of soaring to Greek or Italian levels is good too. The British economy looks steadier than it did, with inflation falling and unemployment at least stable. But that is still a fairly murky picture which cannot plausibly be claimed to look materially brighter the day after the budget than it did the day before it.
Rewarding work? Come off it: the 50p additional rate raises very little tax and is easily avoided by anyone, including journalists and London mayoral candidates able to funnel earnings through a personal company, so a cut to 45p will have scant impact on work incentives. The 50p rate may have caused massive political distortions, but its economic effects have been minimal.
Meanwhile the normal higher-rate taxpayers, who are less able to sell their services through corporate vehicles, have had the rise in their personal allowance trimmed away by adjustments to the 40p threshold. So their “reward for working” is essentially unchanged. The lowest paid taxpayers do have an extra reward for work, but the 40p-ers don’t.
And the parents among those higher-rate taxpayers may welcome the shift to a graduated scheme for cutting their child benefit, compared to the old “cliff edge” but that is hardly a simplification and it still gives them a high effective marginal tax rate as their earnings rise between £50,000 and £60,000.
Which is as it should be: all the sound and fury about “the squeezed middle” ignores the fact that a fiscal consolidation, not to mention a reform of the benefits system, can succeed only if it squeezes the middle. That is where the money is and to whom the most unjustifiable benefits are paid. It just isn’t, and can’t be, a budget to reward work, promote growth and so on.
What about the backing for business, the national infrastructure plan, the ambition for exports, the claim to have made Britain “the most competitive tax regime in the world”? Well, here’s hoping. But there is rather less here than meets the eye.
The ambition to double exports to £1 trillion a year by 2020 is not impossible—with seven years to go after this one, it just requires our exports to grow by 10% a year, which is what they have anyway been doing in the past couple of years—but whether it succeeds or fails depends mainly on whether customers want to and are able to buy, not on any measures announced here.
The lie to the “most competitive tax regime” claim is shown by the Treasury’s own graph. Britain will, with a corporate tax rate for large firms of 22% in 2014, have the lowest rate of any of the Group of 20 countries that act as the world’s main economic steering committee. But most of those with higher corporate tax rates also have faster economic growth than Britain—notably the United States, which is at the top of the graph.
A low corporate tax rate will not make much difference, as the OBR has confirmed: it reckons the cut might raise business investment by 1%, or £3.4 billion between now and 2016. That sounds a lot to you and me, but it is just 0.2% of GDP, spread over four years. If that is what it does, we will barely notice.
The real verdict on Chancellor Osborne will have to wait until Britain has, as he confidently said it will, “earned its way” out of trouble. If that does happen, without further ado, historians will see him as having indeed been an iron fellow, a stern helmsman who kept the ship on a steady course. They won’t, on the evidence so far, class him as a reforming chancellor, to be placed alongside Lord Lawson, for example: the reforms here were more political than practical. But there is always next year. Can’t wait.