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A Tinkerer’s Budget for Britain



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Other countries’ budgets are hard to assess on the day of; we lack the hinterland of background knowledge to do so. But the economic commentator, Allister Heath, editor of City AM, suggested that the first question we might ask of yesterday’s British budget should be: Does it hang together philosophically so that its specific tax and benefit changes seem consistent with its overall aim? Or is it a tinkerer’s jumble of different and inconsistent proposals with no clear theme? Heath’s preference was for philosophical clarity best represented, he thought, by Nigel Lawson, chancellor in Margaret Thatcher’s day, who radically cut income-tax rates and simplified the entire system. The best case of a tinkering chancellor is Labour’s Gordon Brown, who smuggled massive redistribution into the tax system through a complex cat’s cradle of tax credits and “stealth taxes.”

When George Osborne, the current chancellor, sat down in Parliament yesterday, it was clear that his budget belonged to the Brownite tradition of bewildering complexity, right down to the tactic familiar from Brown’s budgets that Osborne’s most unpopular measure — a sharp tax increase on pensioners — was buried in the fine print of financial statistics and not really acknowledged in the budget speech itself. Otherwise the budget had many ingredients but, like Churchill’s famous pudding, it had no theme. Its measures to stimulate growth such as a cut in corporation tax were offset by measures to penalize unpopular companies, including the banks. It takes some poorer workers out of tax, but it pays for this by pushing older taxpayers into higher-tax territory by what the media are calling “a granny tax.” It increases stamp duty on the sale of homes worth more than $3 million and sets a limit on tax reliefs of $75,000 — two measures that look like hitting the rich but that will really hit the housing market and charities. And so on, and so forth.

The fatuity of this balancing act is best seen in Osborne’s decision to cut the top punitive rate of income tax from its current 50 percent to 45 percent. The 50 percent rate had been set by Gordon Brown as a trap for the incoming Tories in the dying days of the Labour government. If they left it in place, they would damage the economy and betray their own beliefs; if they reduced it to 40 percent, they would be charged with favoring the rich at a time of general hardship. This trap was made more uncomfortable by the chancellor’s Liberal Democrat colleagues who insisted that if the top rate were to be cut, it would have to be offset by other tax hikes on the rich. As a result the two weeks leading up to the budget were dominated by the question in Whitehall and the media: which taxes should we hike?

#more#Having helped to foster this poisonous atmosphere, Osborne then made the worst possible decision: He reduced the 50 per cent rate halfway to only 45 per cent and announced that the change would not take place until 2013. Given his justifications — the tax raised very little revenue, drove away high earners, and damaged the economy — why is he waiting a year to introduce it, thus continuing this damage? He won’t be denounced any less because the reduction in the tax is five rather than 10 percentage points. Indeed, he may be denounced more because it smacks of timidity and invites attack. He was certainly being attacked on budget night by the left-wing media as a Sheriff of Nottingham rather than a Robin Hood figure. If he wants to complete the reduction to 40 next year or later, he will have to endure the same abuse a second time — which means the rate may be stuck at 45 percent forever. As Professor P. T. Bauer used to say on such occasions in the 1970s: “They prefer to be hanged for a lamb rather than for a sheep.”

There are many other points to be made about a complex budget riddled with minor tax changes aimed to assist or punish particular industries. The 10 percent “stealth” increase in the airline-passenger duty or “tax on vacations” means that the Brits now pay more for flying abroad than any other nation. It may also feed a damaging suspicion: not that ministers are virtuously “Green” but that they are well-heeled and think foreign holidays are too good for the rest of us. A “granny tax” could not come at a worse time than when, as now, inflation is sharply reducing the value of annuities for the retired. But the main failure of the budget, as several commentators have pointed out, is to rule out spending cuts made for the purpose of cutting taxes (or, in this budget, for the purpose of not raising taxes.)

The result is that any reduction in the budget deficit will rest disproportionately on tax increases when the underlying problem is one of government overspending. In effect, as Fraser Nelson points out, this means that spending levels are more sacrosanct than the deficit reduction that was supposed to be the Holy Grail of this coalition. And the further result is that the chancellor was not able to introduce the kind of bold cuts in tax and regulation that the sluggish British economy needs.

Maybe, however, we can sum up the budget philosophically despite its contradictions. It was supposed to be a budget showing that Britain was open for business. Instead, as one wag put it, it shows that Britain is open for business in the afternoon.



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