Wednesday, 22 April 2009

Budget commentary

Britain now faces the challenge of a massive overhang of public debt with public borrowing estimated to soar to £175bn in this financial year with a similar amount to be borrowed next year. Managing that debt involves a combination of tax increases and cuts in public expenditure. This task is not made easier by the fact that corporate and personal tax revenues fall in a recession while payments on unemployment benefits increases.

The Government is going to have to sell far more gilt-edged stock than anticipated and there are doubts about the ability of the market to absorb more than £200bn of gilts, particularly if international investors start to doubt the credibility of the UK economy. One of the ways of retaining that credibility is to show that the UK is fiscally responsible but what that means in practice is pain for UK taxpayers and users of public services.

The damage in terms of the toxic debts of the banks may be greater than the Treasury is allowing for. They have made provisions of up to £60bn for potential losses, but the International Monetary Fund thinks that it may be necessary to make provision for over twice the amount the Government is talking about, in the region of £130bn.

Much of the effort to cut public expenditure rests on ‘efficiency savings’ estimated at £15bn. These have been going on for some years anyway and it is questionable savings of this size can be made. Cutting bureaucracy may seem an attractive way of reducing public spending. But there is a point where it starts to affect citizens. For example, if HM Customs and Revenue are under staffed more mistakes may be made and it may take longer to sort them out.

Making the better off pay more taxes with the new 50 per cent rate and the 45 per cent rate starting this year is also politically attractive, but in reality it often raises very little revenue, particularly given that it is difficult to close off all routes for tax avoidance.

Motorists will be hit with the idea of above inflation rises in petrol duty coming back and the scheme to pay a bounty of £2,000 for scrapping cars over ten years old will only have a marginal effect on the beleaguered motor industry.

It should also be noted that all the Government’s plans rely on a rapid recovery in the economy which many analysts think is unlikely. It’s a hard path ahead.

1 comment:

Justin said...

And, of course, the introduction of a 50% tax rate from next April is a breach of a manifesto pledge not to increase the top rate in this Parliament (assuming the election is not before then).