A very political budget

'Fiscal Phil's' budget was very political and the main target was the benches behind him (I don't buy into the argument that it signals an early general election, the Conservatives aren't going to risk that again). He has enhanced his reputation with the benches behind him and given Mrs May some more breathing space.

It could all still go pear shaped if there is no Brexit agreement, but I still think it is more likely than not that there will be a fudge that will scrape through the Commons, leaving all the difficult issues to be negotiated during the transition period/implementation phase.

What was important was what was not in the budget: no changes to tax allowances on pensions, which cost a lot of money, but would hit Conservative stalwarts hard. Not only were the income tax allowances not frozen, they will be brought forward. Higher rate taxpayers will gain most, but you don't have to be in a top job or earning huge sums to be one of those. Domestic air duty was frozen, as was the duty on beer, cider and spirits, but not wine, drawing a shout of 'Oh no!' from behind the Chancellor.

Public spending is to increase, but not just yet. One billion pounds is going to defence which will please Conservative backbenchers. The £400m for schools will mean £10,000 for the typical primary school and will not help to save a single teaching assistant. It was also delivered with a patronising reference to 'little extras' which has not gone down well with the teaching profession. It should be paid for by the new digital services tax if it manages to raise £400m.

Getting multinationals to pay their fair share of tax has always been a challenge, but even more so now they are not moving goods around in many cases. What is required is international cooperation to deal with tax havens, but that is looking less rather than more likely.

The difficult decisions about where to increase public expenditure and how to pay for it will be deferred until the comprehensive spending review post Brexit. That makes sense, but it doesn't help local authorities teetering on the edge of bankruptcy or the stretched police and prison services. The £700m extra for social care, although welcome, addresses only part of the problem that local government faces.

The corny jokes by the Chancellor diverted attention from the seriousness of the situation: something, but not enough, has been done about Universal Credit which is being used to cut entitlements, particularly it would seem for the disabled and single parents. But there were no apparent gaffes and the antics of feisty Liz Truss provided another amusing diversion.

The budget dilemma

The Institute of Fiscal Studies Green Budget has been a big feature on the airwaves this morning. Understandably so, because it is authoritative and non-partisan and Spreadsheet Phil will be delivering his verdict in less than two weeks: Green Budget

I expect a holding budget with the big public expenditure decisions being delayed until next year. That is only reasonable with so much uncertainty surrounding Brexit. If we crash out, we may need a mild fiscal stimulus.

The fundamental problem is, as always, the public demand for American taxes and Scandinavian public services. Actually, the gap between UK and US taxes as a percentage of GDP has narrowed, although, of course, the US spends more on defence. We have surrendered our previous mid-Atlantic position. There is a lot of grumbling about the highest tax take since the 1940s, but tax as a percentage of GDP is still well below levels in most other European countries.

However, the challenge for Phil is to find ways of increasing taxes without upsetting voters (fuel duty levy) or Conservative voters and backbenchers (national insurance charges for pensioners, reducing tax allowances on pensions). As the IFS makes clear, just to pay the NHS bill and stop all other cuts will require significant tax increases. There are many who think that local government, the police, prisons and some aspects of education need more money.

The prime minister proclaims that austerity has ended, but when Phil reasonably points out that this will mean rowing back on some manifesto promises on tax, he gets slapped down.

Hammond's budget dilemmas

One light was on in No.11 Downing Street in the early hours. Was Phil Hammond putting some finishing touches to his budget?

Phil Hammond is caught between a rock and a hard place, both politically and economically. Politically the Brexiteers in the Cabinet and the party want to get rid of him as the influential remoaner in chief. Whatever kind of budget he produces, it won't call off the hounds.

Economically, he has little room for manoeuvre. He has to produce a Budget that will reboot the Conservative Party but remains fiscally circumspect. With an underlying productivity problem and poor medium-term growth forecasts, that would be a challenge for anyone.

'Spreadsheet' Phil is not the most charismatic politician by a long way. Asked to describe himself with a single word recently he said 'fiscal'. Very commendable, but hardly likely to set the world alight. Despite the usual leaks which means that these days most of the Budget is known in outline before it is delivered, he has been criticised for not personally setting out his stall in the run up to his speech.

Normally the first Budget of a new Parliament would set the narrative for the governing party. An attempt will be made to make housing a central theme as the Conservative Party seeks to claw back the votes of millennials. However, what is likely to be offered is a series of worthy incremental measures rather than a grand strategy that will signal a new direction.

So it looks like a Budget that might be economically sensible, but a political failure whatever it offers.

'Granny tax' may be bad politics

Media coverage of the Budget this morning is focussing on the so-called 'Granny Tax' with some criticism coming from the right-wing press. In part this reflects the fact that it was the one part of the Budget that wasn't leaked in advance (apart from the tax on pasties and sausage rolls). It may well be good policy but bad politcs.

There isn't really a logical justfication for special allowances for the retired (they were introduced by Churchill in 1925), particularly when tax threshholds are being increased. The one argument that is put forward is that it penalises thrift.

One pensioner interviewed in a vox pop said that she didn't think they should be taxed at all. Given the services they consume this is a bit rich to say the least. Pensioners have also been relatively unscathed by austerity with a big pensions increase this April and bus passes and winter fuel allowances untouched. But it illustrates the political problem. There are a lot of retired people and they turn out and vote in numbers.

Another sting in the tail is that the threshhold for paying the higher rate of 40 per cent will actually fall next year making another million people higher rate taxpayers. Some of these people will be in the much vaunted 'squeezed middle'.

IFS claims cause storm

A report by the respected Institute for Fiscal Studies casts doubt on the Coalition Government's claim that the Budget was progressive rather than regressive: Budget

Of course, the IFS is trying to look at a longer time period than the Government, up to 2014 rather than 2012. They attempt to allocate changes to housing benefit, Disability Living Allowance and tax credits to households.

Their conclusion is that low-income households of working age lose the most because of the cuts to welfare spending. Those who lose the least are households of working age without children in the upper half of the income distribution. This is because they do not lose out from cuts in welfare spending and are the biggest beneficiaries from the increase in the income tax personal allowance.

The biggest change to welfare policy in the 2010 budget was linking benefits with the CPI rather than the RPI. This is very likely to mean less generous benefits in the years ahead. The savings from linking to a lower index will compound over time, rising to £5.8bn in 2014-15.

Nick Clegg's initial and rather lame response was that the IFS did not take account of the efforts of the Government to get people off benefits and into work. These efforts are laudable, but previous Governments have tried to do this with mixed success.

Vince lays it on the line

One of the news channels commented that Vince Cable looked 'hemmed in' as he sat on the Treasury bench during the Chancellor's speech yesterday. In truth there isn't much room on the front bench, although there was a certain irony in Vince being placed next to Iain Duncan-Smith.

In this article, Vince does not trip the light fantastic, but lays it on the line about why there was no alternative to a tough budget and why he has channged his mind on some issues: Vince

In ambushing the university vice-chancellors over their pay hikes, Vince showed that he can be a grizzly bear as well as a cuddly one. He can play hard ball, which is as it should be.

One of the constitutional ironies of yesterday's performance was that it was preceded by questions to the Church Commissioners, their spokesman on earth now being Tom Baldry, the member for Banbury.

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.

Preparing for the budget

The sentence being used in briefings for the Sunday press on the Budget was 'A budget that is popular the day after is not a good budget'. The public has been prepared for medicine which will be nasty, but may turn out to be a little bit less unpleasant than expected.

Any VAT increase cannot be implemented immediately for practical reasons. Indeed it is difficult to see how it could be introduced until the autumn and it would not be too popular just before Christmas. So I would not expect it to be intoduced until after the January sales and possibly not until April.

One off the wall prediction which will probably be wrong: an increase in the current VAT rate of 5 per cent on domestic fuel. It is below the EU average of 8 per cent and could be sold as a carbon reduction measure.

The fiscal Nimbyists were out in force today. People in Sheffield were upset because of the withdrawal of the loan to Sheffield Forgemasters, but if it is such a viable project, why can't it be funded commercially? On Midlands television, people from Bromsgrove were complaining because they won't get an admittedly needed new station.

Although talk of a double dip reception is overdone, the Government does need to be careful about how it cuts capital projects. These are usually cut severely in times of public expenditure restraint, because it is a way of achieving quick results in cutting spending.

However, the downside is that necessary infrastructure improvements which can contribute to economic growth do not occur. The construction industry is a labour intensive one and has already been hit hard by the downturn in house building which may be intensified by the Government's promised 'Nimby's charter' to block development.

It is clear that the Government is prepared to 'think the unthinkable' about benefits and Frank Field has been brought back to finish the job that he should have been allowed to undertake by New Labour. 'Two brains' Willetts made it clear yesterday that while some universal benefits would always be part of the welfare state, there was a need to re-consider the balance between them and selective benefis.

With increasing life expectancy, generous public sector pensions are no longer affordable and John Hutton has been brought in to tackle this thorny problem. He was immediately denounced by the soon to be ennobled Prezza as a 'collaborator': at least he didn't use the phrase 'class traitor'. As someone remarked it's the revenge of the Blairites.

The scrumpy Budget

All the talk on social networking sites and on Radio 5 has been about the tax increase on cider. Apparently it has upset a lot of people in the west country, but I shouldn't think that will worry Labour too much given its lack of seats in the cider growing areas.

Although there have been a series of departmental statements about 'efficiency savings' which, of course, have to be achieved, and in any event are not likely to be painless, the real decisions have been postponed until after the election. Should Labour get back, there will be a comprehensive spending review and probably another budget before the year is out. If the Conservatives return, they have promised an emergency budget in 50 days.

Both parties are being very coy about a rise in Value Added Tax. To the annoyance of his colleagues, Alastair Darling has refused to rule it out, but under any scenario, he is unlikely to be Chancellor after the election. George Osborne was evasive when he was questioned on Radio 5 this morning, saying that he didn't have any specific plans, which does not mean that he would not do it.

Osborne was critical of the Government decision to freeze personal tax allowances which was not mentioned in the Budget speech at all, but it is difficult to see what else the Government could do in the circumstances and he made no commitment to reverse the decision.

Labour's strategy in a very political budget was clearly to try and shore up core Labour support with a 'soak the rich' approach, emphasising that 60 per cent of the tax increases would be borne by 5 per cent of the population. Broadly, I would think that the budget is politically neutral as well as fiscally neutral, i.e., it won't shift many votes either way except perhaps a few disgruntled cider drinkers.

I did the budget hour on BBC Coventry and Warwickshire last night and the guy trying to do vox pops at the bus station was getting very little response at all, suggesting a great indifference. People don't like the increases in fuel (the cost seems to go up every time one fills up) and drink, but somehow expect them.

I took part in a panel discussion at Rory Bremner's show at Warwick Arts Centre last night and what came across, not surprisingly, was a great disillusionment with the whole political process. There are no easy answers to that with successive revelations about politicians lining their pockets rather than serving the public interest.

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.