Tuesday, 22 June 2010

The unavoidable budget

That is how George Osborne billed his emergency budget today. He also described it as 'tough but fair'. No doubt subsequent debate will focus in part on how far it is.

The Chancellor said that a position in which one pound in every four spent by the Government was borrowed was not sustainable. Nor was it acceptable to have nearly half of national income spent by the Government. A quarter of a trillion pounds will be spent in debt interest over the lifetime of the Parliament.

77 per cent of the target of eliminating the structural deficit over a five year period would be met by spending cuts and 23 per cent by tax increases, largely through a 20 per cent increase in VAT from next January. The current exemptions from VAT remain in place.

Among the most controversial measures will be a two year pay freeze for the public sector (athough the 28 per cent of those earning under £21,000 a year will get a flat £250 increase in each year) and a three year freeze in child benefit. The Chancellor argued that means testing child benefit would have involved too many transaction costs.

One interesting commment by the Chancellor was that the UK was over reliant on financial services and a bank levy will be introduced in 2011. He also said that Conservative governments in the early 1990s made a mistake when they cut capital rather than current spending.

In a sense we will get a second instalment of the pain when the results of the public expenditure review are revealed on Ocrober 20th. However, there is now a credible medium-term fiscal strategy in place which should satisfy the international markets. Credbility with them was a criterion that the Chancellor specifically mentioned.

1 comment:

Justin Greaves said...

Of course, the three year freeze in child benefit should be balanced against the increase in tax credits for poorer families. There is a debate as to whether VAT is actually regressive. An interesting guy from the IFS was on TV saying that it depends on whether you judge it on income at a given point in time or on spending patterns (the latter of which may better reflect people's living standards). Good news on the income tax threshold.