Sprinkling Some Fairy Dust
It’s difficult to know what to make of George Osborne’s sixth budget as the United Kingdom’s Chancellor of the Exchequer (that’s finance minister to the rest of the world). In the days leading up to the last budget of the current Parliament, Osborne promised that headline-grabbing gimmicks would be absent from his speech. But with the general election less than two months away, he would have been almost foolish not to have sprinkled the Budget with at least some fairy dust in the form of tax cuts for low- and middle-income workers and pensioners – winning over the substantial “gray vote” is one way to ensure electoral success. And sprinkle he did. The taxation of savings will be more or less abolished for ordinary savers, while another increase in the personal income tax allowance will ensure that most low-paid workers will be lifted out of income tax altogether. Pension rules will be further relaxed to give people more control over how they spend their retirement savings. By the time of the election, corporate tax will be 20 percent, further supporting the Chancellor’s claim that the UK has the most business-friendly tax regime in the G7. The fact that the UK is growing faster than most advanced economies – as Osborne never tires of telling us – has given him room for these and other tax giveaways and permitted him to announce that the Government’s fiscal consolidation program will end a year earlier than planned in 2019/20. That’ll be just before the next general election. (Coincidence? I don’t think so). The UK’s relatively strong economy allowed Osborne to claim that the sun was coming out again for Britain’s taxpayers. But is this position of economic strength merely superficial? Looking at the situation objectively, it’s perhaps overegging the pudding somewhat to suggest that boom times are returning to Britain. With much of the eurozone crashing and burning, the UK probably looks like it’s doing better than it actually is. Yes, the budget deficit has been halved from its peak of 10 percent during the banking crisis. But under the Government’s original plans it should have been eliminated by now. He also didn’t mention that, under his new fiscal plan, the squeeze on public spending will be greater in the next two years than at any time during the current Parliament. That Osborne kept schtum about this is unsurprising when there’s an election to be fought. On balance, he probably deserves an encomium. However, the Chancellor’s silence on other issues of quite fundamental importance to the UK economy spoke volumes. Maybe the most worrying thing as far as the UK is concerned is its chronic under-productivity, which the current Government seemingly has no answer for. UK productivity has been stagnant since the crisis, and now lags well behind the leading industrialized nations. As wage growth has virtually frozen, it is perhaps unsurprising that tax receipts have been relatively subdued, in spite of the UK’s growing economy. What’s more, the 2015 Budget was not all sweetness and light. There is plenty of devil in the detail: the ill-conceived diverted profits tax remains; and there will be a further erosion of taxpayer rights as the Government intensifies its crackdown on tax avoidance, including the presumption of guilt for those with undeclared offshore bank accounts. And the banks were up in arms after Osborne once again increased the bank levy. Not that they’ll get a great deal of sympathy from me, or many other people for that matter. The measure is expected to raise around GBP900m a year, which is probably the size of a large banking group’s annual bonus pool.