Still no growth strategy
The main measures in this budget had been well-flagged so there was little in the way of surprises in Osborne’s speech. The cut to the higher rate of tax from 50p to 45p was as expected, as was the increase in personal allowances. These changes will be offset in part by making personal allowances for the elderly less favourable and by increasing tax paid on house purchases over £2m. The government has also assumed that we will be able to withdraw from Afghanistan in good order in 2014 without being involved in any other conflicts. It therefore feels able to find £2.4bn from the strategic reserve, with some welcome funds redirected towards improving the quality of life for our armed forces.
This seemed to be a budget with lots of politics going on behind it, at least as far as political positioning within the coalition was concerned. The cut to the 50p tax rate was supported by the Office for Budget Responsibility given the lower-than-expected revenue collected, though it noted the high degree of uncertainty surrounding the assessment. It has the merit of appeasing some Tory backbenchers. The increase to personal allowances enabled the Lib Dems to claim a victory. Clearly the government was content to risk bad headlines (and Labour attacks) over its priorities (tax cut for higher incomes and raising tax from the elderly) given it is still three years away from a general election assuming the coalition holds.
The first document to go to after the chancellor has finished his budget speech is the OBR’s Economic and Fiscal Outlook. Perhaps a major takeaway is that there was nothing in the budget which prompted the OBR to raise its estimates of GDP growth, apart from minor tweaks. The government presented plans to promote growth in the autumn (in addition to a growth plan in the budget a year ago), but at the time the OBR did not assume any boost to growth, citing lack of detail. That remains the case four months on. Worse, the OBR has become more pessimistic about the extent to which the business sector will increase investment, stating that ‘firms’ cash balances may not be able to support as much investment as we previously thought’. The OBR believes that the extra cuts to corporation tax (to 22 per cent in 2014) will provide a one per cent boost, but it has downgraded its business investment forecast by almost seven per cent for this year and now believes investment will increase by less than a percent in 2012. In fact, it has downgraded its investment forecast for the following four years as well, though it expects business investment to grow over 10 per cent in 2015 and 2016 (the OBR retains its overall growth forecast by projecting increases in household consumption and government investment compared with its November forecast).
This hit to the investment forecast is depressing, because the general perception is that larger companies have strong balance sheets and the capacity to increase investment substantially. They are not doing so because they are worried about the banking system and they lack confidence in the prospects for future demand. That is why some analysts believe a corporation tax cut is pointless, because it is not the tax rate which is preventing companies from investing; a cut risks reducing tax revenue for no extra growth. My view is that corporation tax cuts need to be part of a commitment to a simple and predictable tax system for business along with a credible growth plan. Unfortunately, Osborne undermined any reputation he was building in this area when last year he made North Sea oilfield development more expensive, thereby increasing business uncertainty. And the government has yet to find a credible growth strategy.
Labour needs to keep highlighting the regressive nature of Tory-Lib Dem economic policy, which is much more aggressive towards the poor than the rich. At the same time, we need to brand ourselves as the party of investment. That doesn’t always mean government capital spending, though that is important. It does mean a pro-enterprise tax system in an economy where the government is committed to boosting investment spending year on year. Alongside that has to be a commitment that we will always invest in people, starting with a guarantee of work.
First published on the Progress website, 22 March 2012
Progress, 22 March 2012, 28/03/2012