Tuesday 1 March 2011

The proof that Osborne's key budget pledge is meaningless

Chancellor George Osborne will unveil his key pledge for this month's budget today.

But might it unravel before he has even made it, still three weeks before budget day?

The Chancellor launches a hyper-partisan attack on Ed Balls and Labour on the economy in The Guardian, considerably more in the style of an Opposition spokesman than a Chancellor. Balls will doubtless take it as a sign that he has Osborne rattled. But it could be countered, too, that it is Osborne's own thinking on tax in the middle which seems very muddled.

BBC Newsnight on Monday night saw Iain Watson report that "tomorrow, the Chancellor is unveiling what he sees as a key political message: that everyone earning £35,000 a year or less will have a lower personal tax bill as a result of next month's budget".

That sounds like a good message - just as long as people don't somehow get the impression that the Chancellor is promising to reduce their taxes.

"Have a lower personal tax bill - and higher taxes to pay for it" might be less popular.

Matt Hancock MP, George Osborne's former adviser and his regular representative on earth and in the broadcast studios, told Newsnight, in their discussion of the "squeezed middle".

"It is vital that we deal with that problem and I think people understand that. But it also helps as you are going through this to show that there are benefits that can be brought from getting the deficit under control - and one of the things that the government is doing that I strongly applaud is raising the threshold for income tax payers so that, from April, everybody who is paying the basic rate of tax will be paying a little bit less tax, and that helps to show that the government is on the side of people that are working hard".

But this seems a very hollow pledge - since it will not mean people paying less tax, as Howard Reed and Tim Horton have shown.

Firstly, everybody is worse off once the government's VAT hike and tax threshold increases are put together. The government has cut income taxes by £3.7 billion and increased VAT by £12 billion.

Secondly, the decision to shift the burden of taxation is distributionally regressive.

We can see this by looking at this choice, both of which have exactly the same impact on a deficit reduction plan. Even within Osborne's deficit plans, the government could have chosen either of the following options:

(a) Osborne policy: Cut tax thresholds, costing £3.7 billion, increasing VAT further to bring in another £3.7 billion to pay for it.

(b) OR A lower VAT increase: Leave tax thresholds where they were, so being able to avoid one-third of the VAT rise.

(Something similar is true of any future further increases in the income tax threshold in March's budget, in that the opportunity cost is not reducing the VAT increase by a similar amount).

Tim Horton and Howard Reed have again set out the distributional impact, and find that the bottom 30% lose out from the Osborne decision to shift £3.7 billion from direct to indirect taxation.

But then David Cameron has said "I'm a Lawsonian basically" in setting out why he prefers to shift from direct to indirect taxaion, in a pitch to Bob Diamond of Barclays and other top bankers which had them "purring with approval" (according to The Times). George Osborne is a fan of flat taxes too - though it is the squeezed middle who would lose out, as The Economist has set out.

That both Cameron and Osborne are also in favour of reducing inequality too ought to present a dilemma.

The great Osborno was full of smoke and mirrors in his first budget - and didn't do much for his reputation by such a tricksy performance.

It sounds as though there might be much more where that came from on March 23rd.

1 comment:

Tacitus said...

I am less than inclined to take anything Osborne says as accurate. The man seems unable to distinguish fact from reality. Take his assertion that the IFS have supported Tory cuts.

Where has he been? Has he not visited their website or read their briefings? On a number of occasions they have stated quite clearly that his budget will create hardship for thos 'worse off in society'.

It seems Georgy is good at airbrushing too.

Read my blog at http://bit.ly/eLwJ9p