While on March 24 Chancellor George Osborne brandished a new budget box (the old Gladstonian one is falling apart), its content remained old (see my blog “Osborne der Schlächter” of June 2, 2010). The Chancellor stuck to his Plan A of last year – in spite of the fact that the last two quarters GDP fell, the growth forecast for both 2010 and 2011 was reduced by around ½ percentage point each, and inflation has reached an astonishing 4.4%.
Some observers had hoped that this deteriorating economic situation which will increase the budget deficit by an estimated 40 bill GBP over the parliamentary period would induce the Chancellor to switch from his plan to reduce the structural deficit to zero by 2014 (this amounts to 81 bill GBP) by mainly expenditure reductions to a more growth-enhancing strategy. No way: Britain’s stiff upper lip does not tremble. The Chancellor termed his budget “pro-growth”, but it is – and was – “pro consolidation” impairing the feeble recovery. All announcements that “Britain is open for business” and the like will not help in the short run when the expenditure cuts start to bite next week. The massive cutting of front-line communal services, from public libraries, from community social work, from public transport, to arts projects, fire stations, NGOs, social projects and many more, the threatened dismissal of at least 250.000 public workers and the increasing unemployment will hugely affect British society. The independent Institute of Fiscal Studies estimates that this year the average British household will lose 750 GBP as a result of tax rises and expenditure cuts, and that by 2015, the poorest 10% of households will be worse off by 6.5%, the riches by 3%.
Osborne still sticks to his (neo-liberal) belief that rapid budget consolidation is the best way to enhance growth. Yes, he has adorned his budget with a few sweeteners: the gasoline tax has been cut by 1 penny a litre and the planned 4 p increase has been postponed until next year; he has promoted sub-prime-type mortgages for first time buyers, thus driving housing prices up; he has lowered corporate income tax from 28% to 25% and given preferential treatment to offshore incomes; he has increased the tax threshold above which income tax is charged which takes a significant number of persons out of income tax liability – and he has started a (small) apprenticeship support program and loosened planning restrictions for construction. Most of these sweeteners are to be paid by a 2 billion GBP tax on oil company profits. Whether all this will turn de-industrialized Britain into a “maker and inventor”, instead of only a “user” of products, is doubtful, especially given the demand-reducing expenditures cuts. If it were that easy to re-industrialize Britain, no country in the world would be devoid of industrial and service production.
The budget proposal contains one potentially very positive, quite radical, idea: to merge social security contributions (now paid by employees and employers) with personal income tax. This is a multi-year project and, if successful, will lead to more fairness, more transparency and large bureaucratic savings. However, as always, the proof of the pudding is in the eating: it will remain to be seen, how progressive the final schedule is, at which income it starts and whether it will fulfil Osborne’s requirement that it is revenue-neutral, meaning that the joint schedule will produce the same amount of total revenue as its constituent parts. However, judging this government by its actions so far, it must be feared that this project will once again fall victim to the Tories’ ideology and lead to a massive redistribution from poor to rich.
On balance: This budget is still highly contractionary; it will fall most heavily on the poorest; it will generate high unemployment and will increase the divide between the prosperous South and the impoverished North of Britain. What is really worrying is that in the face of a deteriorating economic situation it exhibits stubbornness instead of flexibility. The few microeconomic growth measures are by far outweighed by contractionary consolidation effects. As a “growth” budget it is mis-named. Its moniker is more blah-blah and – unfortunately – will generate more blahs for British citizens.