The UK budget judgement
The surprises in the budget were the big increase in VAT for next year, and the decision to continue with large cash increases in total public spending over the five year period. The Chancellor, who had said that 80/20 was the right balance for spending cuts and tax increases, settled instead for a 57/43 balance in 2011-12 and for 64/36 the following year. His spending totals are:
2009-10 (Last Labour year) £669bn
2010-11 £697bn
2011-12 £700bn
2012-13 £711bn
2013-14 £722bn
2014-15 £737bn (£68bn or 10% above Labour level)
It is true that the substantial cash increases in total public spending still require cuts in some areas. Debt interest, overseas aid and EU contributions, especially the first of these, make up a substantial increase in spending on their own. Labour decided to cut capital investment by around 40% which remains the plan in this budget. If welfare bills do not come down, and if public sector inflation remains a problem then the cuts in other programmes will have to be bigger. If the wage and pensions bill can be held down and the welfare bill brought under control the pressures on the rest of public spending will be reduced. We should place greater reliance on the next two year’s forecasts and less on the subsequent years, as plans will be subject to revision depending on economic recovery, inflation and other variables.
I pointed out in the Budget debate that success for this strategy would depend on assisting a stronger private sector led recovery. Welfare bills will come down faster if more jobs are created. Revenues will be rebuilt more quickly if the private sector grows faster. This will require a new approach to banking regulation to frree the banks to lend more to credit worthy businesses, and a new approach to monetary policy which has allowed easy credit and money creation in the public sector to the exclusion of much else.
It will also require more regulations to be removed from the Statute book to cut business costs. The reduction in the headline rate of Corporation Tax to 24% over the next few years is a welcome move towards restoring greater tax competitiveness, and the cuts in National Insurance will help.
I would like the government to prove Dr Budd wrong. He has forecast from the OBR that the budget will lower Uk growth by 0.1% in the first year and 0.3% in the second year. To prove him wrong the government needs to do more to assist enterprise Britain.