Skip to Content

Coffee House

The levers that Osborne might pull

23 March 2011

10:57 AM

23 March 2011

10:57 AM

Cutting taxes for the low-paid is the most useful thing Osborne can do in what will, I
suspect, be a distinctly unmemorable budget. The Mail and The Sun both have competing figures — £205 and £320 — for the annual rebate. Given that the average Brit is paying
£310 more due to Osborne’s VAT rise in January, one might forgive taxpayers for not
punching the air. And anyone on more than £25k a year is still face a higher tax burden than they did three months ago. But the beauty of Budget day (as Osborne knows) is that you have can
just present one side of the ledger. You can show the ‘give’, not mention the ‘take’ and end up with front pages similar to those which Pete mentioned earlier. (Few newspapers mention the effect of January’s VAT rise, apart from Ed Balls in the Mirror).
The way Budgets work is that only the IFS assemble the full picture, but by then interest in the Budget will have waned.

So what’s Osborne up to? Fighting a good fight — albeit not as hard as I’d like him to. Tories prefer taxing consumption to taxing income, and it seems Osborne is rebalancing a little, for
the low-paid at least. He has moved quickly, to offer real help — and tax cuts are real help — to those confronting inflation. The impact of inflation on shoppers will be far harder
than the impact of VAT, but it’s not quantified — not by the Treasury, not by the IFS — so it will be invisible for media purposes. But crucially, Osborne will be able to claim,
correctly, that he is doing something to alleviate the cost of living.


How will this be paid for? At the risk of raising Danny Finkelstein’s blood pressure, I would not be aghast if Osborne decided that tax cuts spur growth, so the short-term cost can be
debt-financed. Anders Borg, Sweden’s ponytailed finance minister, has just pulled off a debt-financed tax cut, except it ended up being a growth-financed tax cut because so many Swedes returned to
work when it was more worthwhile to do so. As Borg says, it’s demand for jobs — not supply of jobs — that’s the problem. But Sweden is way ahead of the rest of Europe (including
Britain) in grasping this aspect of the jobs market. We’re still in the business of giving bungs to builders, and then being surprised when it turns out that they just hire Eastern Europeans.

But Osborne should pay for his tax cuts by being a little more ambitious in his spending cuts. I’ll wager that today’s budget will, as usual, refuse to quantify those cuts. At present, they’re
about 1.3 per cent a year — a figure, once you know it, that makes Balls claims about "fast and deep" cuts seem laughable. But, politically, it suits both parties to pretend there’s
a great chasm between Osborne and Labour spending plans. The graph below shows the divergence.
 

And how does Osborne’s fiscal tightening compare historically? We’ve compiled the below table that puts Balls’ claims into context (it’s amazing how quickly Balls attack lines dissolve when put in
contact with reality):
 

 
The truth, which it suits neither political party to admit, is that Osborne’s cuts are modest — if unevenly distributed. Already, Osborne’s extra cuts have already instilled greater
confidence in the British economy and led to extra jobs — a great success. A slightly more ambitious savings programme would create the space for more tax cuts. Because when interest rates
start to rise — as they soon will, to cope with the inflation crisis — he’ll have few other levers to pull.


Show comments
Close