The budget contained oodles of minor tweaks here and there. Some people condemn this as tinkering, but they are forgetting that issues that are small on the national stage can be big for those affected, and the Budget is where the Chancellor gets to address lots of minor concerns as well as major ones. That is politics – and none the worse for that – but it is also a proper reflection of the fact that Treasury decisions impact on us as micro-individuals, so sometimes micro-measures are appropriate.
But I'm not especially interested here in any of those matters – worthy as they are. I want to emphasize five key things.
1) This Budget embeds the most radical tax reforming aspect of the Coalition – the huge rise in the personal allowance and thus removal of millions from income tax. If there hadn't been a large rise in the personal allowance at this Budget – if such rises didn't occur even when money was tight and there were not high-profile changes elsewhere – then momentum might have been lost and the raising of personal allowances might have been nothing more than a short-term expedient to assist in acceptance of the spending cuts announcements of 2010. Instead, there is every chance that in economic terms this government will be remembered – long after everyone has forgotten that the top rate was ever 50p – for cutting the deficit and raising the personal allowance.
Speaking as one of the longest-standing advocates of this policy – you can see here (bottom of p21) that I was advocating, as long ago as 2000, focusing all income tax cuts on the personal allowance with a goal of only half the population paying income tax by 2005 - I rather resent the way it is presented in the press as a Lib Dem idea. But I do concede that it was the Lib Dems that made it happen.
2) Connected with the rise in the personal allowance is the large rise in the numbers of higher-rate taxpayers. The Budget raises this by another 300,000 to around four million, about one eighth of all taxpayers. Indeed, at a little over £41,000 the higher rate threshold is now within striking distance of the average full-time male income of homeowners (about £37,000 according to the Halifax – see the last tab, "Price-Earnings" here). The higher rate threshold is now at an income level that getting on for half the population either already has or would anticipate reaching some day. This potentially significantly changes the political calculus of tax measures affecting the basic rate relative to those affecting the higher rate.
3) Planned spending cuts are getting deeper all the time. On leaving office, Labour had planned to cut the deficit by £73bn by 2014/5 including £52bn of spending cuts. In the June 2010 Emergency Budget the Coalition extended that to £128bn of deficit reduction by 2015/6 of which £99bn were spending cuts. By November 2011 the plan was to cut the deficit by £147bn by 2016/17 including £116bn of spending cuts. Now the plan is for £155bn of deficit reduction by 2016/17 including £126bn of spending cuts – and even that only just wipes out the current structural deficit by 2016/17. The amount of the spending cuts pushed off into the next Parliament is growing, also – now at £47bn. That's right – the Conservatives and Lib Dems are currently planning to go into the next election promising to cut spending, in the first two years of the next Parliament, by at least £47bn on top of the cuts continuing through the rest of this Parliament. Good luck with that.
4) The OBR downgraded its estimate of the sustainable growth rate of the economy again. As of June 2010 it thought the rate over this Parliament would be 2.1-2.35%. Regular readers of mine will know I vigorously disputed this figure, contending for my own preferred figure of around 1-1.5% as covered here and defended in detail here (NB techy piece alert) and in my Treasury Select Committee submission here (this one explains and breaks down how and why the sustainable growth rate has fallen – I recommend this).
In its November 2011 report the OBR cut its view of the sustainable growth rate to around 1% over the period of the crisis rising to 1.2% in 2011 and up to 2.3% a couple of years later. In its latest (March 2012) report, accompanying the Budget, the OBR has downgraded its view again – now saying that potential output will grow only 0.8% in 2012. That means that 2011 and 2012 aren't – totally contrary to most press analysis – bad years at all. The OBR forecasts growth of 0.8% for each of those years, but then that's as fast as potential output is growing anyway. Any faster than that would probably be inflationary (small output gap aside) – not too happy given 5% inflation in 2011 and the outlook for 2012 (on which see point 5 below).
The OBR still expects the sustainable growth rate to pick up over the next couple of years. So do I – albeit perhaps by 2015 rather than 2013. It thinks 2.3% is doable – I think so too, perhaps even slightly higher. But if that doesn't happen, or if I'm right and it happens slightly slower and then anything else goes wrong, unless there is very high inflation households will default on their mortgages, the banks will go bust, and the UK sovereign will go bust. So Osborne should be trying everything in his power to get the sustainable growth rate up. At the moment almost the only thing he's doing is cutting spending – which is good, but not enough.
5) Oil prices are forecast to be much higher than the OBR previously thought. In November 2011 the OBR thought oil prices would be $105 / barrel in 2012 falling to $101 in 2013. Now it forecasts $118 / barrel in 2012 falling to $112 in 2013. If events in Syria or / and Iran deteriorate further, that could be highly optimistic. Higher oil prices mean higher fuel prices, so fuel duties become a bigger issue and the (weak) case for green tax increases becomes weaker still – market prices will ration carbon fuels consumption without any more help from government. In addition, household bills rise and pressures on household budgets too.
The OBR doesn't materially change its inflation forecast or its GDP forecasts as a result of higher oil prices. For what it's worth, unless the euro totally collapses (which I don't believe it will) I expect 2012 growth to continue to out-perform official forecasts and inflation to rise back towards 5% and more. Unless there is a slump-cum-banking collapse, inflation is going to be at the very least a niggly issue throughout this Parliament and if there is a recovery in growth, inflation could become the biggest economic issue around well before General Election day.