The Reporting After the March 2011 Budget

Ronan Jack, 24 March 2011

Categories: Politics | Finance |

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This March 2011 budget was always intended to be fiscally neutral, not changing the government's broad economic strategy. The context is that last June's budget set out the policy direction of deficit reduction, funded largely by public spending cuts and to a lesser extent by tax increases. In this budget, the Chancellor sets out a set of changes to particular tax rates and spending plans, but all within the overall framework established in June 2010, that of cutting the deficit.

As the budget unfolded, it was the soundbites that caught the media's attention, competing only with the death of Elizabeth Taylor. In particular, the cut in fuel prices was a natural for quick headlines. The Sun carried a story on the lines of "It's the Sun Wot Won It", in a prominent piece about how Mr Osborne cut fuel duty because he couldn't bear to let down Sun readers. A slightly different take came in the Guardian, which caricatured the approach as "Forget the cuts, just fill up your petrol tanks".

The actual reduction in prices will mean it costs about £3 less to refill a Ford Focus, though the increase in VAT reduces this overall saving to £1.50, which was a little less prominent in the Sun's coverage. And Stephanie Flanders, at the BBC, wonders whether prices will really be held down: "I asked Chief Secretary to the Treasury, Danny Alexander, what would stop the oil companies passing on the cost of the extra tax onto consumers, at the pump. His answer, give or take, was that he didn't think they would, but they'd be looking out for it. Hmmm."

A second headline on the day was the increase in personal tax allowances, worth some £48 a year, almost a pound a week. This was short-lived as a focus of attention, perhaps because in the face of the coming cuts, falling growth forecasts and rising inflation, this and the fuel price cut are like facing a water cannon, armed with a couple of cocktail umbrellas.

Over at the BBC, Nick Robinson reflected that we may be in for a difficult time. "So far much of the talk about spending cuts, benefit curbs and tax rises has been just that - talk. People will really begin to notice the Treasury squeeze at the beginning of the new financial year on 6 April when many of the changes kick in. In the weeks and months after that the spending cuts will begin to be felt."

Some in the media welcome this. The Daily Mail, for example: "The best news about this Budget is that it shows how determined the Chancellor is to press on with his programme of cuts, with no weakening of his resolve to shrink Britain’s grotesquely inflated public spending and boost the private sector." This might seem an odd view, thinking about what the government's approach is likely to do to demand, but the Mail comes from the school of thought that if only the public sector spent less, a vibrant private sector would spring forth. The private sector is cautious at present, mindful of consumers' lack of confidence. If interest rates rise, people will have less to spend on goods and services. Demand, and growth, will fall further.

Will that happen? As it is fundamental to the government's strategy, it's an important question. The whole approach is predicated on economic growth. Unless that growth happens, then cutting public spending can only lead to recession, and the government's plan is that positive effects in the private sector will more than outweigh negative effects in the public sector. The Guardian is doubtful, calling it "less a plan for growth than a plan that hopes for growth".

The Office for Budget Responsibility is doubtful about growth prospects, as reported in the Financial Times. "Robert Chote, head of the OBR, wrote: “We do not believe there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in Budget 2011.” The likely growth-enhancing effects of the relatively expensive cuts to corporation tax and fuel duty 'would be minimal'."

But if the prospects for growth are uncertain, the redistributive effects of the budget are more clear-cut. Johann Hari, in the Independent, gives a scathing view: "The primary effect of this Budget will be to dramatically redistribute wealth. That sounds good until you realise the wealth is being taken from the middle-class and the poor and handed to the only people Osborne has ever really known: the super-rich."

As part of the redistributive effect, Mr Osborne signalled his intent to move away from the 50% upper tax band. He said he would seek evidence about whether a higher rate actually raises more money, but gave the impression that the evidence will follow, rather than guide, the decision.

There are two issues here - motivation, and tax avoidance. It is argued that high taxes have a de-motivating effect, and one regular budget ritual is for some arm of the media to do a vox-pop with someone saying how cutting their tax would motivate them to work harder. For an alternative view based on academic research rather than self-interest, see Dan Pink, illustrated here by RSA Animate.

And on tax avoidance, Osborne announced measures to crack down, raising more money for the Treasury. Sound good? Not to Tax Research UK, a campaigning body devoted to turning over stones and asking some penetrating questions. In a summary of the budget, they conclude that "The new tax avoidance strategy is reiteration of old policy - to disguise the massive boost for tax avoidance inside Osborne’s budget". I’ll bet that we don't hear much about that in the Mail and the Sun.

Already the web is teeming with opinions about the budget. If there is one theme which seems to dominate, it is pessimism that the conditions for growth are as favourable as Mr Osborne would like. With no "Plan B" to fall back on, the budget is widely viewed as something of a gamble. If the gamble goes wrong, the price will be paid by those who have lost their jobs or seen their standard of living eroded. Because, and let's be honest here, it looks like we're not actually all in this together.

Categories in which this article appears: Politics | Finance |

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