Budget for an emergency
Harriet Harman, acting Labour leader responding to Mr Osborne's Emergency Budget Statement said: "This is a Tory Budget that will throw people out of work, hold back economic growth and harm vital public services....It's his first Budget but its the same old Tories....In order to get the deficit down, you need to keep economic growth up and you need to keep unemployment down....Today's Budget is bad for growth and that will make it harder to cut the deficit."
Ms Harman went on to suggest that the Emergency Budget will lead to an extra 200,000 or more joining the unemployed - the working population of a city the size of Coventry - and continued: "This Budget isn't driven by economics. It's driven by ideology - their commitment to a smaller state."
This last statement is an important distinction deserving of consideration as I'm sure that there is more than a little truth in it. It is unlikely that the money markets and ratings agencies would have run out of patience with the UK in the manner that they have done with Greece and Spain. The £6 billion + cuts already announced, added to those adopted from Labour's reduction programme, the scale of which was mostly hidden from the electorate, would probably have sufficed until the major reviews and November's autumn Budget.
Yet whilst making this accusation, Labour must surely be the pot calling the kettle black. Until 2001/02, Gordon Brown as Chancellor, had largely followed the Conservative government's economic policy but after this Mr Brown soon lost any surplus and started to incur deficits in order to boost the budgets of Health and Education in particular.
Big, very big, government in many parts of the UK, financed by deficits deemed affordable on a buoyant economy and optimistic projections for the future, became Labour ideology. A study published by the Institute for Fiscal Studies earlier this year showed that the average real rate of increase in Total Managed Expenditure (central and local government plus government corporations) between 1979 and 1997 was 1.5 percent but between 1997 and 2009 had risen to 3.2 percent against a background, until end of 2006, of strong economic growth. This denotes a structural increase in public spending and the structural portion of the national debt when there is a deficit.
However Ms Harman was only finished at this stage of her Reply with George Osborne and now turned her attack on the Liberal Democrats and Chief Secretary to the Treasury, Danny Alexander:
"The Lib Dems denounced early cuts - now they are backing them. They denounced VAT increases - now they're voting for them....The Lib Dem leaders have sacrificed everything they ever stood for to ride in ministerial cars and to ride on the coat-tails of the Tory Government."
This censure was very much anticipated by the 22 Lib Dems with ministerial positions, hence Nick Clegg's letter to all Liberal Democrat members:
"Labour left our country with a mountain of debt...the Government spend...on interest...over £800 million per week. If we don't take action now, the markets will force us into even more drastic measures as they have in Greece and Spain."
Mr Clegg's letter goes on to reveal that Labour planned cuts of £44 billion and continues: "Until Labour accept the blame for the mess we are in and comes up with a plan for getting us out, they cannot be taken seriously....The new Office for Budget Responsibility has shown that the structural deficit is bigger than we thought. And, in government, we have discarded billions of pounds of unfunded spending promises Labour had made, cynically raising people's hopes when they knew the coffers were bare."
The Budget itself needed to be a tough one, some might argue brutal and unnecessary but it was not by any means all doom and gloom. Some 880,000 low paid workers will be relieved from paying income tax and the basic personal allowance rising from £1,000 to £7,475 (and eventually to £10,000) will make basic rate tax payers better off by £3.25 per week, a rise which reflects what most people in the private sector will get from their employers, if they're lucky (public sector employees please note). Those earning over £40,000 per annum however, will see this modest rise totally wiped out by the Government's retention of Labour's rise in National Insurance for high earners.
Smokers and drinkers were spared - the 10 percent rise in duty on cider was cancelled - and there was no increase in fuel duty, its dear enough, although I'm sure that's not a valid reason in Treasury circles.
Re-establishing the link between the basic state pension and the rise in earnings, the RPI (CPI from 2012) or 2.5 percent, whichever is the greater, is a welcome step in reducing hardship in an increasingly large group of the population with limited or no means of otherwise boosting their income.
The Government will help "low spending councils" in England to freeze Council Tax for one year from next April - doesn't sound too good for the "high" spenders.
Was the Chancellor, George Osborne, ever serious about raising Capital Gains Tax (CGT) to 40 or 50 percent in line with Income Tax bands for the better off? That he hasn't done so, but only raised the upper limit to 28 percent for higher-rate taxpayers, is a rise that has been put on the "winners" side of the balance sheet! Further, the annual exception of £10,000 will remain and the rate for basic-rate taxpayers stays unchanged at 18 percent. Maybe to pacify any Lib Dem rebels, Mr Osborne said that the Treasury (under its Lib Dem Chief Secretary) believed any higher increase would be counterproductive. Even better, the 10 percent rate for entrepreneurs which currently applies to the first £2 million of qualifying gains, will be extended to the first £5 million.
To encourage the establishment of businesses, new firms outside London, the South-East and East of England, will be exempt from £5,000 National Insurance contributions for each of the first 10 employees. Although anything to stimulate small firm growth is to be welcomed, why the geographical limit? There are several areas of real poverty and hardship in this relatively large area needing any entrepreneurial ventures they can secure.
Final cheer for business is that Corporation Tax for small companies will fall to 20 percent from next year and for large, the rate will reduce to 27 percent in April 2011 and then by one percent per annum until it reaches 24 percent.
To pay for this and to help bring down the deficit, we shall all be paying the higher, 20 percent VAT rate, estimated to generate £13 billion, from 04 January 2011. The shock of this announcement in the Budget was all false, it having been an open secret for months past that politicians of all parties had been discussing a rise and this has not subsequently been denied by Opposition spokespersons.
Child Tax Credits will be withdrawn for families earning more than £40,000 per annum and Child Benefit will be frozen for the next three years. From April 2011, Sure Start Maternity Grant of £500 will be restricted to a mother's first child only and the Health in Pregnancy Grant of £190 will be abolished from January 2011. Loan parents will be expected to seek work once their first child goes to school.
Housing Benefit is to be cut by £1.8 billion by "the end of this Parliament" - say £360 million per annum - and this benefit is being limited to a maximum £400 per week for a four-bedroom or larger house. Bless the TV companies for finding some poor soul about to be devastated by this or some other aspect of the Budget. Channel 4 News found a mother of four, or could have been five children in Islington, a carer on the minimum pay, no mention of husband/father, in arrears already and paying £695 per week for her flat. The lady didn't want to move because she liked the area and the school - and she had no idea how she was going to manage. Although no doubt this is a worst-case scenario, it serves to highlight how the ordinary citizen is affected by government decisions taking account of 62 million people and £637 billion of Current Expenditure, due to rise to £711 billion by 2015/16.
To get Disability Living Allowance, new and existing claimants will have to undergo an "objective medical assessment", likely to start in 2013. The cost to the tax payer is currently £11 billion and the claimant count at over five million, is now three times higher than when the allowance was introduced back in 1992.
Helping the Government in areas of social welfare and policy is Frank Field, Labour MP for Birkenhead and once a Minister of State in 1997/98. Mr Field accepted David Cameron's invitation to work in the role of "poverty czar" and will lead a major review into social breakdown, rising crime (in some areas) and benefit dependency culture.
Governments have not had official pay policies in the UK since the 1970s, this one being no exception, however there is one section of the working population that the Government can bear a strong influence and that is the Public Sector. For the 1.7 million of the lowest paid, they are to receive a flat £250 rise this year and next. For those earning over £21,000, their pay will be frozen for the next two years and there's going to be "limits" on the highest paid positions.
To assist the Government, Will Hutton, a left-of-centre and highly influential voice on work, employment and organisation issues, was appointed last month to head an inquiry into civil service salaries and pensions. The pensions issue is particularly serious as there is already a yawning funding gap that will reach over £10 billion by 2015. Mr Hutton is expected to publish an interim review in September this year.
Last but not least, the Banks. Quoting George Osborne: "This was a crisis that started in the banking sector and the failures of the banks imposed a huge cost on the rest of society." On Monday, 21 June, Channel 4 broadcast a TV audience participation programme "How to save £100 billion" and the bankers, amongst others, can be very grateful that the TV audience had no influence over Government policy. They voted for a £20 billion levy, all to be used to reduce the deficit. Mr Osborne agreed with the "2" part and the "billion".
Speaking to my daughter on the phone the day after the Budget, she commented how lightly the banks appeared to get off. Simple, I told her, capital is international and they would walk if really clobbered, or in this case up sticks from London. Where to? Hong Kong and Shanghai Banking Corporation - that's a no brainer; no, not Shanghai. Standard Chartered, again with only a fraction of its business in the UK; and look what Barclays did when it would not accept Government help. The key word is, pragmatism.
All this "blood, sweat and tears" is designed to reduce the deficit to £149 billion in the current year; £116 billion in 2011/12; £89 billion in 12/13; £60 billion in 13/14; and £37 billion in 14/15. Departments not ring fenced face real reductions in their budgets of 25 percent or more. The independent Office for Budget Responsibility reduced Economic Growth forecasts in real terms as follows:
2010 1.2 percent
2011 2.3 "
2012 2.8 "
2013 2.9 "
2014 2.7 "
2015 2.7 "
Unemployment is expected to peak at 8.1 percent this year and fall to 6.1 percent by 2015.
Reaction was generally favourable. Fitch, the ratings agency, praised the Budget as a "strong statement of intent" and said it would "materially strengthen confidence". Just the thing to maintain the UK's AAA seal of approval and like statements came from the financial sector from both sides of "the pond".
Criticism, well of course, only to be expected. Liam Byrne, Shadow Treasury Secretary was quite muted in his, saying: "The Budget slows down recovery and puts more people on the dole...It hits growth, it hits jobs" There was certainly no outright condemnation.
David Kynaston, author of the 2007 bestselling book "Austerity Britain 1945 -1951" told The New York Times: "I think it will be a very hard sell. It will only work if people see that the pain is equally inflicted. We are a very different society now - more individualistic and less willing to listen to exhortations."
A sharper critic was David Blanchflower, Professor of Economics at "Ivy League", Dartmouth College, NH. He told The New York Times; "This is just right wing orthodoxy. The patient is on life support now and if you take it off now, you kill firms off and create a million unemployed workers. It is a classical policy mistake." Well that's certainly told off Adam Smith and David Ricardo amongst others!
Well, is it an extra 100,000, or 200,000, or a million extra unemployed that this Budget will create and will it work in the medium to long term? I like to think that the glass is half-full and that as we are all going to bite the bullet sooner rather than later, then the sooner we shall come out of these hard times.
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