Article

Little change from the UK budget - John Redwood comment

March 29, 2010

The UK budget was never going to be a very interesting or decisive event. Many of the tax proposals had been announced in the Pre Budget report. The government was always going to be reluctant to spell out the incidence of spending cuts in future years to halve the deficit, so close to an election. The Chancellor was never going to have much room to allow more spending or tax giveaways, whilst he was unlikely to want to be too tough shortly before appealing to the voters.
 

So it proved. The budget judgment revolved around "giving away" just £1.4 billion, or 0.1% of national Income. There was an electorally slanted package to help small businesses, a temporary reduction in stamp duty for first time buyers, some more CGT relief for entrepreneurs, and a phasing of fuel duty which were helpful measures. There was a further attack on so called tax loopholes, offshore taxpayers, and cider drinkers, and a failure to index income tax allowances. The government is pressing on with its three part deficit reduction programme. Tax increases are to account for £19 billion, spending cuts for £39 billion, and growth for another £20 billion.

The Chancellor forecast slower growth for the present year, but thinks growth will accelerate to around 3.5% the year after. Most private sector forecasters think this is too optimistic. If growth is lower, then more of the deficit programme has to be undertaken by tax rises or spending cuts, reinforcing gloom in the economy.
In practise we will not know the reality of the spending programmes for either Labour or Conservatives in office after the election, until the new government has conducted a proper public spending review. Labour say they will undertake one to get to an answer next autumn. The Conservatives say they would have an emergency budget within 50 days of the likely election on May 6th to start to cut spending, to be followed by a detailed public spending review and the publication of three year departmental forecasts.

Both main parties recognise that much has to be achieved by cutting overheads, reducing the back office, and improving efficiency. Labour are being criticised for saying they will save money by cutting sickness absence in the NHS. They are right, at last, to see the serious losses through absence in the public sector, where absence rates are much higher than in the private sector. They also need to explain how they would manage it down, given their inability to do so so far. Labour also wish to transfer many more civil servants out of London, saving on property and London related personnel costs. Both main parties wish to make bigger savings on energy consumption.

There will doubtless be much heat but not so much light generated in the next few weeks during the election on what to cut, how to cut, and when to cut. We will not be providing a running commentary on this on this website. Our view remains the same. We still see the UK as a high risk economy for investors, because private sector debt was much too high, because a couple of large banks are still undergoing compulsory slimming, and because the public deficit is still growing far too quickly. The markets reaction to the budget was a small fall in gilts, and another fall in the pound against the dollar. UK government debt, and the underlying currency, needs clear evidence of a plan which can be delivered to control the public deficit before the risks are worth running. At the moment the priority of the authorities appears to be to ensure cheap money for the public sector, whatever that may do to inflation and the pound.