openEconomy

A Defining Budget I: What does the UK budget mean?

What is the balance of the ideological, tactical and necessary in the axe-wielding plans for the UK public sector announced today?
Tony Curzon Price
Tony Curzon Price
22 June 2010

There are three big questions about the budget:

  1. is it good to cut the deficit so much and so soon?
  2. assuming so - for the sake of it - how much ideology is there in the nature of the deficit cuts?
  3. how much simple tactical politics is there in the deficit cuts?

The first has been much discussed. I like Robert Skidelsky's pre-budget cautious scepticism about it in the FT:

We are about to embark on a momentous experiment to discover which of the two stories about the economy is true. If, in fact, fiscal consolidation proves to be the royal road to recovery and fast growth then we might as well bury Keynes once and for all. If however, the financial markets and their political fuglemen turn out to be as "super-asinine" as Keynes thought they were, then the challenge that financial power poses to good government has to be squarely faced.

Let's park that question. It is the big one, but all we have left to do now on that is wait and see.

How much ideology was there in the deficit cutting? Quite a lot is the answer. Big pieces of tax raising are either regressive or not very progressive. VAT rises are non-redistributive; 28% capital gains for high income earners continues to be a great tax shelter since decent accountants shouldn't find it too hard to turn income (taxed at a marginal rate of 50% for top earners) into capital gains (taxed at just 28% for them). True, the increase in the income tax threshold is a welcome increase in progressivity. But the benefit cuts announced are also regressive, with disability living allowance and other tax credits going. The bank levy, at £2bn, is symbolic for an industry that is so uncomptetitive and un-reformed that it makes that amount in the blink of a deal, and on the taxpayer's dime to boot.

The same purported need to cut deficits could have been satisfied more progressively, for example by

  • introducing a land tax
  • raising income tax (progressively) rather than VAT
  • getting tax-payers to get proper returns from their social under-writing of finance through a "social dividend" (ie profit tax) on banks

But the real test of the ideological content of the plan for the economy will be how the bulk cuts of 25 per cent across much of government expenditure are achieved. Is this just an excuse to slash at public provision of services with the real intent of reducing the size of the state? Or does the coalition recognise that public provision has real value in many instances and that cuts should sensitively scale back rather than abandon whole areas of service provision? The ring-fencing of the NHS budget suggests there is still some possibility that the spending cuts are not entirely about taking apart public services, although the fact that 75% of the deficit reduction is being achieved by cuts rather than tax increases also provides a strong hint: if public service had been considered valuable, greater tax increases - even regressive ones like VAT -  would have been attractive.

The worst-case would be if the coalition returned to the worst of privatisation-era thinking by which public services were replaced by manager-dominated fat-cat private providers.

How much of the budget is tactical? I imagine a lot. The first task of a government is to get re-elected, and pain early followed by pre-election boomlet is the royal road to being returned. It was mis-timed by months by Clarke and Major, and Blair was beautifully served by the cycle. This is a very unfortunate aspect of our electoral calendars, and I think the US system of having rolling elections for parts of the legislature at short time intervals might be part of the solution.

A second aspect of the tactics takes me back to the first and big question: why, when there is absolutely no indication that "the markets" are in any way spooked yet by the UK's level of debt did the coalition so embrace the prospect of the threat? After all, while recognising the threat that savers might one day want more and more compensation for lending to the government, why not wait for that actually to start to happen before acting to avoid it?

The reason for this irrationality is also some mix of the tactical and ideological. Idelogical in that it provides the opportunity to fundamentally reform the UK's tax system and the scale of public provision of services – here is the crisis that is not only not to be wasted, but is so good that it needs to be anticipated. But there is also a large tactical element. If interest rates start to rise by even just a few points, the indebted middle class households of Britain will feel more aggrieved and threatened in their lifestyles and in their souls than by an increase in VAT. This government is hugely risk averse when it comes to increases in interest rates, and is not even prepared to call the bluff of those international lenders that we are told are breathing down the public neck.

What went wrong in the system for this risk aversion to grip the government? We invested too heavily in bad projects, especially homes. And so it comes full circle: if the government is making the wrong choices about debt today, it is because of the politics of coping with the indebtedness that the City was so incentivised to create. And if we really are in a position in which deficits need to be cut sharply and soon, it is because the growth that we should have enjoyed in the coming decade from all that investment will not materialise. So either way, the blame points back to a financial services sector that grew out of control.

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