There are 3 key criteria for judging today’s Budget. One is the composition of measures for reducing the £155b deficit. The emphasis of pre-Budget leaking has been heavily on public spending cuts, much more moderately (20% as opposed to 80%) on tax increases, and no reference at all to economic growth. You wouldn’t guess it from the PR softening-up process, but the latter is actually the most important of the three options. Here’s why.
The new Office of Budget Responsibility (OBR) has estimated UK growth this year at 1.6%, and then 2.6%, 2.8%, and again 2.8% for the following 3 years. Since each 1% of growth adds an annual £15b to UK national income, these forward projections of economic growth imply an increase in UK income of about £150b. Existing tax levels would then secure an extra £60b for the Exchequer. One central question therefore for assessing the Budget is whether the spending cuts and tax increases tomorrow squash out the growth-generating potential of the economy, which would be a false economy, a counter-productive saving.
The second is where (quite apart from the impact of whatever measures he himself introduces tomorrow) he expects growth to come from over the next few years. Household consumption, which accounts for two-thirds of national output, is almost certain to fall, especially if VAT is raised to around 20%. Real wage growth is weak, and likely to weaken further when unemployment rises. The housing market is at its lowest ebb since 1923. Consumer confidence is fading. Exports, some 60% of which go to Europe, are held back by the crisis in the eurozone and and the deficit-cutting austerity throughout the EU. So the second question for the Budget: is deficit-cutting fixation impaling Britain on a no-growth path for years ahead, with rising joblessness and stagnant GDP?
The third issue is, are we really all in it together as Osborne parrots endlessly, or have the bankers and the super-rich made a massive killing for a decade and are now going to get a slap on the wrist to show willing, while public sector workers whose real wages have been flat since 2005 are now going to be punished by a massive loss of both jobs and income? One figure should stand out – according to the Sunday Times 2010 Rich List, just 1,000 multi-millionaires have nearly quadrupled their wealth since 1997 by no less than £335b, £77b of it in the last year alone when everyone else was having to tighten their belt. Raising CGT to 40% and imposing a £2-3b levy on the banks is a mere facade of fairness for this segment of the elite. Bashing the poor while letting off the real perpetrators of the financial crash with a peu de chose won’t pass muster.