22 April 2009

Well, I got a bit of what I wanted, but only a bit

Today's Budget is, in one very particular way, the best New Labour has ever produced. The new 50% supertax on incomes over £150,000 is a welcome (if partial) reversal of the downward trend in top rates of the Thatcher years. The Institute of Directors are up in arms about it, which pretty much guarantees that it's the right thing to do. (Simon Heffer also doesn't like it - which doubly means it's the right thing to do. "Idiocy, bigotry, tribalism and sheer class hatred" - yep, I'll have some of that please.)

The supertax isn't perfect - the ever-astute Vince Cable (best Labour Chancellor we never had - yet?) has pointed out that it won't affect people who are able to pay themselves in capital gains rather than income (e.g. private equity bosses) as the rate on capital gains remains at 18%, and the government should definitely think about a 50% top rate of CGT to match. There are a lot of other tax avoidance issues to sort out as well, as Richard Murphy of Tax Justice Network points out. But the 50% top rate is at least the first step towards a sensible tax policy. And it's very unlikely it would ever have happened under Tony Blair.

Other than that, the good news is a bit thin on the ground. The government has largely rejected a further fiscal stimulus, mistakenly in my view. There is a tiny bit of extra money for the Child Tax Credit - £20 per child per year - but this is nowhere near enough to enable the government to meet its child poverty target for 2011. A bit of extra investment for green technologies, but again, very small beer - about £500 million according to Richard Murphy. Nowhere near the amount that the Green New Deal group has identified as necessary.

Of course the main reason the extra spending was so thin on the ground was because advocates of a further fisacl stimulus couldn't convince the Treasury in the face of the rapid - and continuing - deterioration of the public finances combined with the cost of bailing out the banks. Borrowing could be up to £200 billion this year - a post-war record. Bigger than 1976 when Labour went to the IMF, who were a similar wrecking crew then to what they are now. 

Given the speed and ferocity with which the public finances have unravelled, it's understandable that the Budget projects only 0.7% per year real growth in public spending over the period from 2010-11 onwards. Understandable... but wrong. 

For one thing, it's not a credible spending path. The economic growth projections that the govt published yesterday were less of a trip to fantasy island than the infamous PBR 2008 projections but they are still wildly optimistic about the pace of recovery. The truth is this: after 30 years of misplaced trust in market forces and bubble finance, the UK economy - perhaps more dependent on financial services than any other economy - has had the guts ripped out of it. Recovery, when it comes, will most likely be slow and halting. That's if it comes at all, and we don't slip into Japan-style depression. So, the 3.5% growth prediction in 2011 is cloud cuckoo land stuff.

It seems that the private sector is most unlikely to precipitate a strong recovery on its own - particularly after the Government's green industries package proved to be something of a damp squib. Instead, we need, if anything, to expand public sector investment during the recovery - focusing on building the transport, technological and skills infrastructure that will enable us to work our way out of recession. 

Taxes will need to rise by a quite substantial amount once the recovery starts, to pay for this. For sure, there is some public spending we can cut; any use of management consultants by the NHS or local councils, by example, should be banned. They're overpaid and ineffectual. The ID cards scheme and NHS IT scheme, also both completely ineffective, could be canned. We don't need to replace Trident. 

But this is small beer in the wider scheme of things. Let's not kid ourselves that it's easy to cut public spending without any adverse effects on services - there is no evidence whatsoever for that view. All the evidence in fact is that cutting 'back office' functions - the easiest target - impedes delivery effectiveness. HMRC is a good case in point; reduced to a point in which staff have to routinely cut callers off to meet government targets. 

The next few years is when we finally realise that we can't have continental European levels of public services unless we pay European levels of tax to go with them. Not an easy lesson to learn, but a necessary one. 

1 comment:

Van Patten said...

I wouldn't expect Simon Heffer (Or indeed if you read the Mail site for Peter Hitchens) to welcome any budget from this government, even if it advocated the abolition of Income tax and 80% public expenditure cuts. Whilst finding him mildly diverting, I think we can safely sideline his contribution for its economic insight.

The problem with your argument is that it seems to rest on the premise that public expenditure is of itself an inherent good. The current administration have showered largesse on the public sector (in 1996/97 the amount was around £300 billion, this year it's more than doubled from that figure, are you contending general inflation has risen by more than 8% per year in that intervening period?)

I just have no confidence that this money will not be frittered away as so much general expenditure has in the last decade. Every Wednesday there is a vast array of jobs in the 'Society' Section of the Guardian which are related to politically correct fields such as gender, disability, sexual orentation and ethnicity. The current vogue for environmental issues in the face of mounting issues with the 'Climate change' campaign has also spawned an intriguing number of positions. This area appears unaffected by the recession as yet. Of the jobs on offer here most are couched in highly jargonesque language, and are to my admittedly layman mind of questionable value. I think it highly likely that in current expenditure terms alone the savings to be made by a 'recruitment freeze' let alone a cull on such roles are of a magnitude far greater than the £10 billion envisaged in the Budget. If the pension entitlement are rescinded also (as you advocate for Fred Goodwin) the savings intensify even more. I'd say a ballpark figure of £100 billion is far from out of the question.

If we were to withdraw our armed forces from the conflagrations in the Middle East, this would also yield substantial savings. However, I do grant that investment in transport infrastructure in particular might be desirable, but until such time as the economic position improves considerably, Darling's budget cuts are only a ridiculously small gesture, and nowhere near sufficient to rectify our increasingly catastrophic fiscal position. We can't spend our way out of the recession. We need a return to a much more self reliant community and an encouragement of individual savings if we are to extricate ourselves from the current quagmire.