This is not, I should begin by saying, a Budget which can be digested in five minutes. It may have been nominally an Emergency Budget but it is exceptionally rich in measures, policies, changes in tone, figures and analysis. However, here are a few of the most important nuggets to help you understand just where this seminal financial statement leaves us.
The scale of the challenge
Pasted below is the big picture in one little table. The Government is facing a deficit the size of which it has never seen before, partly as a result of the financial crisis and partly because Gordon Brown left the books in such a state. The previous Government committed to spending cuts and tax rises of a combined £73bn by 2014/15 (look at the “policy inherited by the Government” bit). This Government is now planning to cut a further £40bn on top of this. The total £113bn of fiscal tightening amounts to the biggest squeeze this country has had to endure since comparable records began in 1948 – and probably rather earlier: perhaps the 1930s might be the best comparison.
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You’ll note that this Budget also plans an even bigger squeeze of £128bn in 2015/16 – beyond the horizon provided at the last Government’s Budget.
Tax rises or spending cuts?
Before the election, Osborne said repeatedly he intended to cut spending by around 4p for every penny of tax increases. He didn’t quite manage to hit this magic 80-20 ratio, he mentioned in the speech, but he got pretty close, with a ratio of 77:23 spending cuts vs tax rises. The evidence can be seen in this table from the Budget documentation.
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Here you can see that what’s being announced today amounts to – by 2014/15 we’re talking about net tax rises of £8.23bn and spending cuts of £31.9bn (of which £11bn are from the welfare budget). That’s near enough to 80:20. But there are two important provisos:
1. The ratio only gets near 80:20 by the end of the Parliament. In the first year, the balance is far more shifted towards tax rises. The ratio then is closer to 60:40 spending cuts/tax rises. The pragmatic explanation is that it takes a longer time to cut spending than raising taxes, but it underlines the fact that this fiscal consolidation cannot be achieved purely through a bit of state frugality.
2. Note that the spending and tax totals is a net one. So although in total, £8.2bn is being raised in new taxes by 2014/15, this total is only due to a rather massive VAT increase being balanced out by some smaller tax giveaways. The full story of this can be seen from the tables I’ve pasted in below. These tables (which you’ll need to click on to enlarge) will be familiar to regular Budget-watchers as the full run-down of what separate measures will raise or cost. Worth spending a few moments running your eyes down there. But note that VAT raises a whopping £13.5bn by 2014/15, while the increase in Capital Gains Tax raises only raises £925m. Changing the capital allowances rate (something which affects manufacturers in particular) will raise double this by the end of the Parliament.
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ditto
A bit of Brownian Budgetism?
Have a look in the table above of the sharp compound increase in the money made by number 22 in the list – benefits, specifically the impact of indexing tax credits and public sector pensions to the Consumer Price Index rather than the Retail Price Index. This may not seem like a big deal, but in actual fact it amounts to a major squeeze on benefits recipients. RPI is a proper cost of living, which is why peoples’ benefits payments have always been linked to it or earnings. CPI does not include the impact of house prices, council tax, mortgage costs and a number of other factors which means it is always around 1-2pc lower. This may not make so much of an impact in the first year (as indeed it doesn’t, bringing in £1.1bn, but as these smaller annual increases mount up the amount the Government spends on these benefits drops exponentially. By the end of the Parliament the Government is saving some £5.8bn through this accounting change alone – by far and away the biggest of the welfare savings. Is it me or does this have an uncanny echo of the Brown pensions grab early in his time as Chancellor – only this time the victims are not pensioners but benefits recipients?
Soak the rich
The above having been said, if you were in any doubt that this was a Budget which will force the rich to pay the most, here is the key chart from the Budget documentation itself, which shows that the richest 10pc of the population (with incomes over £49,700) will pay almost £1600 extra a year as a result of its measures (although this also includes measures from Labour’s previous plans, including the National Insurance increases). But even the poorest are hit hard as well, having to pay an extra £200 per household.
As a proportion of household income, the richest will end up losing 2pc of their incomes – becoming the biggest victims. The poorest tenth of the populaton will lose 1.5pc of their annual incomes. The average loss of money across the population will bw around 1.4pc.
And that, in the end is the bottom line on this Budget. As the Chancellor said in his speech, everyone will suffer. This is not merely a question of morality – I suspect there is a good deal of political expediency. The scale of the cuts is so great that if there is any suspicion that some parts of the population are not paying their part, there will be widespread social disaffection that threatens to boil over before this Parliament is finished. And that is before one considers the impact on the stability of the coalition.
Do the markets like it?
One of the big questions investors wanted to know from the Chancellor is what kind of mandate he was setting himself on cutting the deficit (a mandate which will be monitored by the independent Office for Budget Responsibility). Well the challenge is twofold: to eliminate the structural current budget deficit, excluding net public investment, by 2015/16 and to have net public debt falling as a share of GDP by that year.
On the face of it, this looked a little less ambitious than I expected, since I was expecting some kind of target for the structural budget deficit (ie not current – which means it excludes investment). However, that is before you consider that the Chancellor is aiming to meet these targets one year earlier by 2014/15. The fact that the Government will be borrowing significantly less than expected means that it will be selling fewer gilts than expected, which is good news for the markets, which had been paranoid about the Government over-borrowing. Indeed, with the Debt Management Office now having to borrow £20.2bn less, it has cancelled three gilt auctions.
The gilt markets and the pound seem to be pleased with the Coalition’s plan. As you can see from this intraday chart of the 10-year gilt yield – a good yardstick of markets’ fears about either default or inflation in the UK- traders are charging Britain less of a premium to borrow on capital markets. The rate dropped quite sharply during the speech, and although it has jumped back thereafter, it remains well below this morning’s levels (and massively lower than the circa 4pc at the time of the final Alistair Darling Budget).
The yield on the 10-year gilt yield - a lower yield indicates less concern about a country defaulting or inflating away its debt
The sterling chart is always buffeted more by international factors, but again it shows the pound strengthening against the dollar. Both charts are being seen as quietly encouraging by the Treasury.
pound vs dollar
Tuesday, 22 June 2010
Budget 2010: Your five-minute guide – Telegraph Blogs
