A thinly veiled and unbalanced budget to come? Knowns, possibles and likely silences for Budget 2014

March 18, 2014

We already know some of the important themes of tomorrow’s budget.  Below, is a brief look at some of those issues we can expect to come up in George Osborne’s speech tomorrow, and also a few that ought to be receiving attention, but most likely will not.  Overall the discussion suggests that Osborne will present a highly unbalanced budget, but that some high profile policy announcements may be used to obscure this from view.  The discussion below shows what we know we can expect from the Budget today, what might come up and the important issues that probably won’t be covered.

Knowns

• The deficit and public spending cuts – this has been a, perhaps the, defining aspect of the Coalition Government’s policy programme and has obviously attracted much controversy.  Only about half of the planned fiscal consolidation (which comes mainly from public spending cuts rather than tax increases) will have been implemented by the end of this financial year.  Despite this, public debt has risen to about 75% of  national income. A whole range of further cuts to welfare and other public spending are planned to take place between now and the end of 2018-19 when the current government projects the budget to return to a surplus and to start to reduce the high current levels of public debt.  Given there is an election to take place between now and the realisation of these cuts, several commentators (such as Poly Toynbee and the Institute for Fiscal Studies), have expressed doubt over the political commitment to deliver these.  By planning spending cuts now, Osborne is simply shaping the political debate after the election.  It may be unlikely that any government could actually deliver them because of their political impact as public services collapse and crises emerge. In the event of a change of government though – a future Chancellor would have to explain why they were abandoning the planned cuts, opening up scope for criticism.
• Tax increases versus spending cuts  – The Coalition have so far sought to reduce public sector borrowing (the rate at which overall public debt grows) by spending cuts, which mainly hurt those at the bottom of the income distribution.  Tomorrow’s budget is an opportunity to balance this with tax increases for the wealthiest, whose incomes are now recovering from the financial crisis.  Don’t hold your breath.

Courtesy of the IFS, click to goto the presentation

• Growth versus austerity – So too, the Coalition’s preference for austerity rather than reducing public debt through stimulating growth has also been controversial.  While recent data suggests an uncertain recovery is underway in terms of growth, there is continuing concern that this is simply driven by taking up the slack in unused capacity rather than structural growth in the underlying economy.  Real and sustained growth may require investments in fixed assets and infrastructure, and the Chancellor ought – but probably won’t – address the question of whether current and planned spending reductions might actually undermine long-term growth potential in the underlying economy.
• Welfare spending and a welfare cap – Speaking on Sunday George Osborne promised a ‘Welfare Cap’ to limit the current and future government’s spending on welfare.  This plays to, and further encourages, a politics of populism but it doesn’t make economic sense.  First the evidence.  About half of welfare spending on welfare relates to pensions, and the Coalition has increased rather than reduced this commitment.  Moreover, as I argued when I launched our Global Inequalities research programme last month, welfare spending acts as an ‘automatic stabiliser’ when the economy slows.  In the recent crisis, progressive taxation and welfare acted to prevent a much deeper recession and protected those at the bottom from further reductions in their standards of living.  Only about 60% of welfare cuts already planned have been implemented so far, and they are projected to lead to rapidly increasing inequality in an already unequal society.  The Welfare Cap, and promises that a future Conservative government will reduce welfare spending still further look pernicious, populist and may end up undermining growth.

• Childcare – yesterday morning the headlines were captured by a Government promise to introduce a new allowance to help families with the costs of childcare.  Scrutiny will be needed here not on the overall size of the scheme but how it is designed and who will benefit from it.
• Housing – Osborne and the Prime Minister have already announced plans to continue with ‘Help to Buy’ and to extend the scheme to support newly built houses with the expectation that this will lead to 120,000 new homes a year, including a 15,000 new homes in a ‘Garden City’ to be built in Ebbsfleet on the HS2 line between Calais and London.  With property prices rising once again and the chances of younger people getting access to the housing market becoming much more unequal, it is certainly true that we need more houses.  But Help to Buy might actually accentuate rises in house prices and housing charity Shelter estimates that we need something like 250,000 more new homes a year.  Further, it would be useful to hear how housing policy might be dovetailed with economic policy to rebalance growth away from London and the South East.  Again, don’t expect any major headway there.

Possibles

There are other areas where we might also expect an eye catching announcement in the budget.  These include increases to the National Minimum Wage and to increasing still further the personal tax allowance.  Both measures have featured in public debate recently and both would be eye catching.  At the end of last year the Low Pay Commission recommended a 3% increase in the NMW.  Given the increases in inequality of pay over the last few years this would be welcome, but it wouldn’t do enough to offset the changes already increasing inequality.  Similarly, increasing the personal tax allowance has been widely trailed by Nick Clegg as a key Liberal Democrat policy.  However, estimates show that the beneficial effects of this are felt most by the upper-middle income earners, not those at the bottom.  In both cases then, these are policy announcements whose initial gloss is much more impressive than their substance and might be used as a distraction from reality of further upward redistribution in the wider policy agenda.

Likely silences

Despite high profile efforts to put the issue on the agenda, inequality is likely to be the elephant in the room tomorrow.  On Monday Oxfam released a report showing that the five wealthiest families have the same wealth as the bottom 20% of the UK population.  Yesterday the Equality Trust published research which suggested that inequality costs the UK a notional £39bn a year in social costs associated with the gap between average inequality in the OECD and the relatively high level in the UK.  Yet the trajectory of changes in the labour market, asset ownership and future savings and social security provision suggests that inequality is likely to increase in the immediate and longer-term.  That’s on top of an already unequal society and an increasing acceptance among even relatively conservative commentators such as the OECD, IMF and the World Economic Forum that inequality is bad for growth and for social stability.  Despite all this, as the discussion above suggests, the budget is unlikely to be used as a vehicle to address this.

The other likely silence is on efforts to deal with the structural problems associated with Youth Unemployment and increased labour market insecurity for young people.  This is a big issue, and requires government attention, but small changes in the unemployment figures are being used as a means of sweeping this under the carpet as a non-issue.

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Written by alexnunn1 Posted in Posts Tagged with budget; inequality