Thursday, 10 December 2009

A political pre-budget report

Not surprisingly, the pre-budget report was a highly political document. It postponed most public expenditure cuts until 2011 and was not specific about where these would fall. However, given that schools, the police and the health service will be 'ring fenced', this implies cuts of something like 5 per cent a year for three years in other services, unprecedented cuts in the post-war period.

Quite a lot of taxation pain will fall on those on middle incomes with the further rise in national insurance contributions which are in effect an income tax (except that those of pensionable age do not pay them) but are not perceived as such by voters. The 40 per cent threshhold has been frozen for the next tax year which will drag more people into paying a higher rate of tax.

The whole plan is based on a return to growth rates of 3.5 per cent which look excessively optimistic. When the economy grows above the trend rate of 2.5 per cent, this is invariably not sustained for very long and brings problems in its wake.

By 2012 about half of public expenditure will be Annual Managed Expenditure. This surely argues for some cuts in entitlements, but poltically that is very difficult to do. As it is, the 2.5 per cent rise in the state pension next year amounts to a 4 per cent increase in real terms.

The model Labour is advancing amounts to deal with about two-thirds of the structural deficit through spending cuts and one-third through taxation whereas Treasury research suggests that a 80:20 split works best.

Labour clearly lacks an appetite for cuts on the scale required, which is perhaps understandable. Local government is going to take a hit and will increasingly have to provide services on an 'Easycouncil' model with a basic core service being offered and charges for anything which goes beyond that.

The attack on bankers' bonuses may be seen as a cynical ploy and could actually reduce revenue. Politically, this PBR does little for Labour's election chances and it looks as if the poisoned chalice will fall to Dave Cameron.

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