Tomorrow, George Osborne introduces his first real Budget. Journalists often write about the final touches being put to the Budget although most of the details will have been settled many weeks ago. George will have spent the weekend reading the papers, trying to sort out in his mind, pure speculation from real leaks. Regrettably these days – the rot started with Gordon Brown – quite a few details seem to be leaked, though no doubt George Osborne would like to surprise if he possibly can.
In many ways, the best Budget the Chancellor could introduce would be one that did nothing. The Chancellor has courageously set out his strategy over five years, moving Britain back towards budget balance, largely through expenditure cuts but also with some tax increases. The overwhelming important task is to stick to that strategy.
The Chancellor has little room for significant, so called, “giveaways”. Borrowing is expected to come in £3 billion – £5 billion or so lower than previously forecast. Alas, these sums, and even larger ones, are insignificant when put against the mountain of debt reduction the economy has yet to climb. For this reason, he would be wise to “pocket” most of any reduction in Britain’s highly inflated borrowings. Nonetheless, he is widely expected, given the sharp rise in oil prices to cancel the 1p per litre rise in the duty on petrol to come in on April 1st.
The Budget has been trailed as a “budget for growth” and is expected to include a revival of enterprise zones, the easing of planning permission in certain areas, a bonfire of red tape, exemption for small businesses from certain employment laws and measures of tax simplification including possibly even a start on the massive job of integrating national insurance and income tax.
Supply side measures to help growth will be very welcome. They are what is needed, just as happened under Conservative Governments in the 1980s. But Chancellors can’t just magic growth with a snap of a fingers out of a top hat. Experience shows that measures like those above, take years to have effect. The Chancellor must be careful not to be misunderstood and let false hopes rise. He needs his cover for sticking to his declared policy and growth is indeed what the whole policy of debt reduction is designed to allow.
The best supply side measure to improve growth is one that he can’t afford to bring into play, and that would be a reduction in the marginal rates of income tax. It would also be unreal to expect him to set out in stages, any strategy for reducing taxes but it would be good to hear him emphasise the direction of travel.
A lot of attention is focussed on the 50% rate of tax which it undoubtedly is harmful to UK plc. But almost as important, and becoming more so every day, is the starting rate for the 40% rate of tax. This was originally the top rate of tax and now starts as just over £42,000 per year. At present, four million people are paying it, which is a scandalously large number, and the IFS projects that number will rise to over six million people, a staggering number for what was, and hopefully one day will be again, the top rate of tax. Plainly the threshold should be increased over time but that is expensive and has been made more difficult by the decision to have massive increases in personal allowances.
Stamp duty on housing is another urgent area. Transactions in the housing market are half the long term average and projected to fall by many people. The present level of stamp duty may prove unsustainable if we ever want the housing market to be where it was previously.
Alas, none of these taxes can be cut in the Budget tomorrow but it would be good to hear the Chancellor say that he has his sights set on at least some of them and recognises that lower taxes overall, is essential to Britain’s competitiveness and ability to create jobs.