This week’s Budget appears to have attracted attention for two things that aren’t really news. First, while the government’s economic growth projections are more optimistic than the City’s, it’s surprising that anyone takes any economic forecasting seriously at all after the performance of these economic soothsayers over the past two years.
Second, notwithstanding the government’s weak argument that it can’t yet plan for spending cuts because the future is uncertain, it’s hardly a surprise that there was little detail on cuts six weeks away from polling day. The hard work will be done in the summer, and the markets had already priced that in.
Was this a political or a statesman-like budget? Well, ducked cuts aside, we can judge how serious the government is by looking at the new spending measures. Has the £4.5bn or so planned additional spending for the next three years been allocated wisely? Additional spending over the next three years can be grouped under four headings: give-aways; small business help; investment; and jobs.
The stamp duty cut for first-time buyers is the most worrying give-away measure for three reasons. First, it’s likely that the real beneficiaries of the tax cut will not actually be first-time buyers, as sellers raise their prices in the knowledge that buyers no longer have to pay tax. Second, it’s highly questionable whether government should be enticing young buyers into a housing market that’s over-valued and surviving on £300bn of soon-to-be-withdrawn government subsidy. Finally, if the private sector is to grow to step into the growth void left by the retrenching state, we need credit to flow to British business not unproductive bricks and mortar.
Of the other give-away measures:
- The staging of the fuel duty rise will be a helpful fillip to industry and is therefore a useful stimulus
- The £600m for pensioners is an expensive measure that will likely take money out of the economy at a crucial time, since pensioners tend to be reticent consumers. Benefiting wealthy pensioners as much as to poor ones, the measure is also regressive
- The child tax credit give-away is only scheduled for 2012-13, by which time what has been given with one hand will have been taken away many times over once the cuts begin
The small businesses measures seem like a more positive development. SMEs will benefit from the small business relief on rates, and since it is this sector of the economy that we need to be the engine of growth, this seems like a reasonably good use of money.
The new investment money is also welcome. Even when in the depths of an unprecedented public finance black hole, investment remains crucial to ensure the sustainability of the recovery. In this regard, the doubling of the annual investment allowance, together with an expansion of higher education and almost £400m spending on transport infrastructure is a good use of the deficit.
On jobs, the new spending is a little more questionable. The government has announced an extension for an extra year after April 2011 of its Future Jobs Fund that helps unemployed people into subsidised jobs. But the chancellor expects growth to be running at up to 3.5% by next year, in which case the labour market should be rapidly tightening, making it hard to see why the government feels the need to announce such an extension now.
Overall then, about half of the £4.5bn of new spending planned for 2010-13 is justifiable. But the other half looks more like electioneering. That’s about as good as we could have expected in a Budget that’s six weeks from polling day – perhaps only the incurably naïve would disagree.
Ian Mulheirn is director of the Social Market Foundation
