Osborne has scored a political own goal with a budget that will harm pensioners but do little to help the recovery but its long-term impact remains to be determined.
It normally takes a day or two before we know if a budget is a success, as journalists and the public alike try to wade through the thicket of government spin and work out what it all really means. However, the reaction to George Osborne’s latest fiscal event has been rapid-and rightly critical.
From a policy standpoint, the central charge is that the budget lacks substance but involves risks. Osborne has set out to do a lot with very little. The total fiscal effect of the measures announced yesterday comes to just £1.1bn, peanuts in budgetary terms. By contrast, the total impact of government’s austerity programme will be around £155bn by the time it concludes in 2016-7. Osborne has relied on a series on stealth tax rises and spending cuts, plus a dose of luck in the form of lower than expected costs from Afghan operations, to bridge the gap between his desire for eye-catching measures and his lack of fiscal wiggle room. Overall, the budget has done little to alter the overall profile of the public finances or how austerity will be funded: 83 per cent of the government’s fiscal retrenchment will continue be funded through spending cuts.
In addition, despite a basket of much touted micro-measures and a business tax cut, the budget will do almost nothing to improve the country’s growth prospects: the Office of Budget Responsibility has admitted that the measures will boost growth by only one tenth of one percent this year. It is completely silent on jobs. Moreover, it will not change the fact that hardworking families will be worse off in 2013 as a cumulative result of the measures introduced by the Coalition. Those at the bottom will be among the hardest hit: buried in the Budget’s appendicies is the admission that those with incomes in the bottom fifth will experience a net loss of hundreds of pounds.
While the budget achieves little in economic terms, it does, however, bring with it more risks and further pain. To make the numbers add up, Osborne has relied on optimistic assumptions about how much his new measures to tax the wealthy and cut tax avoidance will bring in and how much revenue he will forfeit by cutting the 50p tax rate. Should these assumptions prove wrong, he could be left with a black hole that will need to be filled through further cuts or tax rises. Moreover, to meet his deficit targets, Osborne has conveniently pencilled in a further £10bn of cuts of welfare spending for after the next election.
Osborne’s package of measures is politically risky as well. It is nothing if not politically ambitious. The problem is that the Chancellor’s ambition, coupled with the internal politics of the coalition and the Tory party, may have caused him to misjudge the optics and positioning of his budget package.
His decision to cut the top rate of tax could politely be described as ‘perplexing’. The largest measure by far in Osborne’s budget-the increase in personal allowances- would have helped him to frame the budget effectively as a package for working people. Yet he allowed it to be overshadowed by the cut in the 50p rate, a measure one thirtieth its size, muddying his positioning and playing to the most damaging stereotypes about Tory elitism in the process. Leaving aside the unfairness of cutting taxes for the well-off while others struggle, the political strategy behind these moves is not obvious.
The raid on pensioners’ personal allowances is even less explicable. Having witnessed the storm that enveloped the Brown government following the abolition of the 10p tax rate, you would have thought the Chancellor would have learnt the lesson that robbing Peter to pay Paul for the sake of a budget headline is a risky business. This measure may please policy wonks, who have long argued that the elderly have been disproportionately advantaged by the tax and benefits system and protected more than others from austerity. But it could create significant problems for the coalition among one of their key constituencies, especially if other factors, such as low interest rates, continue to squeeze the living standards of the elderly over the medium term.
What’s more, Osborne has managed to exacerbate the negative impact of the announcement through poor handling. The golden rule for all budgets is that there should be no nasty surprises. All bad news should be briefed in advance. That it was not can only lead us to surmise that either someone dropped the ball-unlikely-or that it was agreed at the last moment.
This may point to an explanation for Osborne’s questionable tactical decisions: they are the result of internal coalition and Tory politics. Osborne’s cut to the top rate was as much about appealing to the right wing of his own party as any wider political calculus. Similarly, the cuts to age-related allowances bear the hallmarks of a last minute deal stitched together to fund a policy that the Liberal Democrats dearly wanted, rather than of considered policy.
This brings us to a wider point. It is clear that the short-term gamble Osborne undertook in balancing tax cuts for working people with those for the better off and cuts that hit pensioners may not pay off and may, in the latter case, leave the coalition with a significant on-going problem. But it is too early to dismiss Osborne’s budget as a political failure. As many commentators have pointed out, the gamble on growth and on a rising tax take from the rich may yet come off.
But, more importantly, the budget, even if it does not command widespread popular support, may yet succeed on its own terms.
First, it may help the government change the narrative of cuts over the coming year. 2012 looks likely to be the hardest year of the parliament for the Coalition. Growth is stagnating and unemployment is stubbornly highly while the cumulative effects of spending cuts and tax rises will really begin to really kick in. The coalition need to keep the public from focusing on the squeeze on their living standards until growth starts to return during 2013. Assuming it is not swamped by talk of the ‘granny tax’, the budget could help the government keep voters focused on eye catching headline tax cuts, rather than the cumulative reality of a large squeeze on most families.
Second, the budget has preserved Osborne’s room for manoeuvre and allowed him to keep his powder dry. The Conservatives’ longer-term route map is clear. They want to save any additional fiscal wiggle room for 2014-5 so that they can cut taxes or increase elements of spending in the run up to the next election. Under this strategy, the combination of tax cuts, resumed growth and a claim to have nursed the public finances back to health will deliver them the next election. Set in this context, the role of this budget is no more than to keep the government on course, to get them over the bump of the coalition’s hardest year and not to use up the ammunition they will need later. Measured against that yardstick, the budget, as long as it does not trigger too much of a backlash from pensioners, may yet be successful.
Third, on a connected point, this budget may help Osborne widen his options. Details buried in the text, on the pension age and welfare spending for example may lay the ground work for future measures that will give the Tories more degrees of freedom later on so that they can stick to their strategy even if the economy continues to struggle.
Fourth, it will help the coalition diffuse some potential political difficulties, consolidating their support from business and from families with higher rate taxpayers.
Finally, the budget may help cement the Coalition. Tory backbenchers have been fed red meat and the Liberals have got their rise in personal allowances. In a fortnight that saw Nick Clegg defend the NHS reforms to his own party conference and a succession of Liberals defend a raid on pensioners, few can now doubt that the party, more than ever, are well and truly lashed to the coalition’s mast.
None of this is to minimise the opportunity this budget offers. Osborne looks to have scored a significant own goal and Labour should take advantage, building on the excellent showing Ed Miliband made in the Commons yesterday. But we cannot take our eye off the ball. Our focus must remain on winning the long-term arguments not only about fairness, but also about growth, jobs and fiscal responsibility. That will be the ultimate litmus test for Labour’s economic and fiscal policy in 2012 and beyond.
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David Pinto-Duschinsky was formerly a special adviser at the Treasury and the Home Office
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Photo: The Prime Minister’s Office