150709 Revenue neutral Budgets
  • Revenue neutrality… Revenue neutral, revenue neutral, revenue neutral. It was striking how often those two words rubbed up against each other during the last Parliament. They were used, of course, to refer to George Osborne’s Budgets which gave as much as they took, and took as much as they gave. For a Chancellor who is mostly known for reducing the deficit, he sure likes to keep the public finances on an even footing.
  • …in most cases. I thought I’d test the revenue neutrality of Osborne’s Budgets by producing the graph above. It shows the fiscal effects of his policies for the five years after they were first announced. The blue bars represent things that contribute to the cause of fiscal consolidation, these being spending cuts and tax hikes. The red bars represent the spending hikes and tax cuts that detract from it. You’ll notice that in the majority of cases – eight of the 12 Budgets – the blue and red bars basically balance each other out. These are the revenue neutral Budgets.
  • Exceptions the first, second and third. The most glaring exception is Osborne’s very first Budget, from June 2010. It cut taxes and raised spending to the tune of about £20 billion. But it also included almost £65 billion worth of spending cuts and tax hikes, such as increasing the main rate of VAT to 20 per cent. This meant that the “net takeaway” was £45 billion – big money and a big statement. This statement was then repeated, although more quietly, in the Autumn Statements of 2011 (net takeaway: just under £17 billion) and 2012 (£9 billon).
  • Exception the fourth. Yesterday’s Budget stands out too. It made £7 billion of giveaways and £24 billion of takeaways, meaning a net takeaway of just over £17 billion. That’s still only a quarter of the total from 2010, but it is the largest since then. In spirit, at least, Osborne has begun this Parliament as he began the last one.
  • Zero-sum game. In some ways this isn’t too surprising: Chancellors will use their first Budget of a Parliament to set the parameters for the rest of the term; then they can just get on with the business of keeping the public finances ticking over. Yet this is still worth remembering when Osborne stands up to the despatch box in future. A lot is said and written about the individual policies in Budgets. But add them all together, and the sum is generally zero.