Budget 2013: Osborne crosses fingers and hopes ‘steady as she goes’ will come good by 2015

George Osborne with Red Box, Budget 2012Move along, nothing to see here… This was a steady-as-she-goes budget at a time when the economy is anything-but-steady.

Of course as Lib Dems it’s great to welcome the final push towards lifting all those paid less than £10,000 out of income tax. As my Co-Editor Caron Lindsay notes here, this is a policy direct from the front page of our 2010 manifesto to the Coalition’s budget. That’s no mean achievement — we know that because the Tories keep trying to claim it as their own policy, even though it didn’t feature in their last manifesto at all.

Lib Dem ministers and members will quite rightly talk it up (if we don’t, who will?) as part of the ‘stronger economy, fairer society’ mantra. This, after all, is a policy designed to achieve both: a fiscal stimulus to the economy which benefits most the low-paid and middle-income earners. But let’s recognise the reality for most taxpayers: livings standards have fallen on the Coalition’s watch, as this graph from the Spectator makes clear:

living standards - spectator graph - mar 2013

After four years of decline, real wages may be about to bottom out. (Though who puts much store by the economic forecasts right now?) The Coalition is banking on the promised return to anaemic growth, and a possible up-tick in real wages, being acknowledged, however grudgingly, by the voters in 2015.

If that happens, it won’t be the result of George Osborne’s genius. It will be the result of two factors. First, George Osborne long since abandoned Plan A’s dependence on cutting the deficit. As Vince Cable notes in his New Statesman essay:

… the data does not support the conclusion that deficit reduction has had dramatic effects on the economy. There has been only modest reduction in the budget deficit, partly because the government has been allowing counter-cyclical stabilisers to operate, and partly because we have taken the conscious decision not to introduce further cuts at a time when the weaker economy has damaged tax revenues. … [The Coalition was] sufficiently pragmatic to allow the fiscal consolidation to drift from four years to seven.

Secondly, Labour, even after three years of trying, has failed to persuade voters they have a viable alternative. Labour’s Catch-22 dilemma is simple enough: the failure of the economy to recover exacerbates the UK’s debt problem, and few voters think Labour is the party best able to tackle it.

Two other points worth noting…

First, the Coalition has clearly been stung by the NIESR “chart of doom” showing how the current economic downturn is the worst in a century. Here’s the Treasury’s partial response, highlighting how “employment performance in the UK compares favourably with post-war experience”:

employment graph - mar 2013

Secondly, though the employment figures are welcome respite from all the other dire economic statistics that abound, Lib Dems need to think hard about this graph, showing how generally regressive has been the cumulative impact of the Coalition’s tax-and-benefit changes:

cumulative impact graph - mar 2013

That suggests that lifting the income tax threshold still further — a change which will benefit only those earning above £10,000 — is not the way to deliver social justice.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and editor of the 2013 publication, The Coalition and Beyond: Liberal Reforms for the Decade Ahead. He is also a Research Associate for the liberal think-tank CentreForum and writes at his own site, The Collected Stephen Tall.

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13 Comments

  • Andrew Suffield 20th Mar '13 - 9:14pm

    That suggests that lifting the income tax threshold still further — a change which will benefit only those earning above £10,000 — is not the way to deliver social justice.

    Obviously you can’t do much by changing income policies – tax or otherwise – for people who earn less than the full-time minimum wage. You have to look instead at why they are not in full-time employment, and all too often you’re going to find a failure of the education system is involved. That’s certainly something that needs attention, and something the government has been trying to address, but it’s also something you cannot have much impact on over a single political cycle. It takes decades for changes in education policy to show up in the income figures.

  • Peter Hayes 20th Mar '13 - 9:20pm

    Chart 2 shows the real target of the budget, to keep 6th to 8th decile voting Conservative. Those in the lower deciles either do not vote or are expected to vote Labour so can be ignored. How do we persuade council estates in places like Cheltenham to vote LibDem, as they regularly do to keep the Tories out if we accept this budget.

  • Something looks very odd in the first chart: why do the projected CPI- and RPI-adjusted real earnings index projections diverge so much?

  • A Social Liberal 20th Mar '13 - 11:06pm

    When I was very young my brother and sister, my mother and I had to hide from the rent man because my father had drunk the rent money away.

    The coalition governments smoke and mirrors with regard to the deficit is the national equivilent to hiding from the rent man. Osborne has scuttled round the departments demanding that work gets put off and bills are not paid.

    Govenrmental robbing Peter to pay Paul – God save us.

  • Andrew Suffield 20th Mar '13 - 11:41pm

    Labour hid from the rent man. This is us paying for it. It really sucks.

  • Stephen Donnelly 20th Mar '13 - 11:48pm

    “That suggests that lifting the income tax threshold still further — a change which will benefit only those earning above £10,000 — is not the way to deliver social justice.”

    £10000 pa is less than the minimum wage for adults, increasing the threshold would still be of significant benefit to the working poor.

  • Stephen – I think Andrew’s point is that raising the threshold only benefits those people earning between 10 and 12,000 and the bigger poverty issue is people below that level where they will stop being eligible for tax credits.

    There are reasons for increasing the tax threshold which are valid in and of themselves – but you are moving further up the income scales in terms of who you benefit.

    We are becoming fetished over the tax threshold – the front page manifesto pledge wasn’t to increase the threshold, it was “Fair Taxes (that put money back in your pocket)”

  • That first chart implies a sudden and dramatic divergence between RPI and CPI from 2014 onwards which, if it isn’t a mistake (as I suspect) would be kind of worrying?

  • Bill le Breton 21st Mar '13 - 7:51am

    Stephen, congratulations on this article that brings light into much darkness. There is however, still another important crevice to explore.

    The headline at the Office for Budget Responsibility is: Weaker Receipts Halt Fall in Deficit. The economy is stuck fast this year, next year and the year after.

    So, the budget was to all intents and purposes fiscally neutral. Where comes growth then? It has to be monetary policy. To quote from Cable’s article, the ‘big bazooka’.

    Well, from the monetary armoury, the Quad has reached for the pop-gun. It reviewed here http://cdn.hm-treasury.gov.uk/ukecon_mon_policy_framework.pdf the existing regime imposed on the Bank of England – you know, the one that has produced virtually no increase in aggregate demand since 2010 – and whimped out.

    That is why the OBR forecasts remain so bleak. That is why receipts remain weak (financial code for limited life chances).

    Insiders tell me that they still believe that the new Governor, when he arrives in July, will be able to increase aggregate demand quicker than forecast. So, why not give him a clear rule book and a new Monetary Policy Committee to help him achieve that?

    Last night the Chairman of the Federal Reserve went out to bat for the US defending their decision to keep up the asset purchases at $85 billion a month – $45b on Treasuries and $40b on other securities: and interest rates frozen until 2015/16! Japan’s new PM and new Bank Governor are doing similarly bold monetary stimulus.

    We remain strangely European on monetary policy. Forsaking out Anglo Saxon independence. In the 1930s economies recovered at different rates. The UK recovered fastest because we were the most innovative and the boldest in leaving the monetarily restrictive Gold Standard.

    This time round, we are with the timid and the unimaginative and those lacking confidence. It is a sign that our Establishment at Westminster, Whitehall and the City are second rate.

    Those really interested need to read for themselves the OBR’s dark story of the years to come: http://cdn.budgetresponsibility.independent.gov.uk/March-2013-EFO-44734674673453.pdf

  • Helen Dudden 21st Mar '13 - 8:33am

    I think you should google up This Is Bath, I live in Don Fosters area, read the local article on those who will suffer, time for a little less politics!

  • The budget was totally a damp squib.

    The 1p of beer is going to do nothing for our economy. With rising inflation, increasing food and fuel costs, wages falling in real terms. Household budgets are squeezed to such and extent that people are just not going out to pubs/clubs as much, hence the reason that so many pubs are closing down.
    Most pubs are brewery tied and have such high running costs, this budget will have done nothing to stimulate this failing industry.

    The freeze in fuel duty will do nothing to the average household. Petrol is constantly fluctuating between 1.34 and 1.38 a liter, despite the freeze in fuel duty, families are struggling to fill up their tanks.

    The Help to Buy scheme risks causing yet another housing bubble, artificially pushing up costs, and why should tax payers be risking and subsidizing people to buy a home. This will no doubt end up pushing up rents yet again in the private sector rental markets.

    The government will spend an extra £225m to get 15,000 affordable houses under construction in England (but apparently not the rest of the country) by 2015. This is simply not good enough. The government needs a much more aggressive approach to build a lot more affordable and social housing. Only when we have more social housing will the inflated rents in the private sector will start to fall and the housing benefit bill will come down.

    Whilst the 10k tax allowance is a good thing, it is not coming in until 2014, whilst the millionaires have been given a tax cut that comes into effect in April this year.

    The government is fiddling the employment figures. The real unemployment count is much higher than what is suggested. The DWP are encouraging more and more people to take part in the enterprise scheme and becoming self employed, they are sent on 2 week courses to learn thing like “carpet fitting” they are lent up to a £1000 to get started up with costs of tools etc and they are then given £1,274 on top of this for 6 months. The individual is then not classed as unemployed or claiming JSA (despite this enterprise fund being paid from the DWP)
    The sole purpose of this scheme is to hide the true extent of unemployed people and lower the statistics of the JSA claimant count”

    The 3 billion announced for infrastructure is needed now to stimulate the economy not in 2015 and the figure needs to be much higher than this.

    Capping wages and benefits at 1% for the next 3 years will see further reductions in peoples incomes and spending power., especially when inflation is as high as it is and probably set to rise further still.

    The only people who benefited from this budget are the millionaires and the large companies who will benefit from the 1 % cut in corporation tax. And lets face it, it’s just less tax they will have to try and hide up offshore somewhere.

  • Liberal Neil 22nd Mar '13 - 11:48am

    “That suggests that lifting the income tax threshold still further — a change which will benefit only those earning above £10,000 — is not the way to deliver social justice.”

    The chart doesn’t show that at all. In fact it shows that raising the income tax threshold has helped all basic rate taxpayers including those at the bottom end, for whom extra cash may make more difference. Raising the income tax threshold further, and particularly raising the NI threshold to match, would make a further positive difference.

    What the chart does show is that this measure is not enough in itself, and that defending those on the lowest incomes from further cuts in benefits is also an important part of the package.

    It is also worth noting, though, that most households up to at least the 8th decile are not earning what most people would consider to be ‘high’ incomes. In fact two earner households on average salaries would be fairly high up the income deciles.

  • Bill,
    I agree with you that monetary policy is the correct tool to use if we want to find an effective growth policy, but it is composed of two main elements – money supply and interest rates.

    You have previously indicated a consistent preference for the wrong one because you’ve overlooked the existing structural problems.

    Expanding money supply will not increase demand because this ignores the global component of the economic situation. Yet interest rates cannot fall any lower to encourage borrowing.

    However when we look at the current level of interest rates and the recapitalised balance sheets of banks in the aftermath of the financial crunch we can see lending is being discouraged because of the lowered rate of return.

    Meanwhile cash-rich members of society (such as home-owning pensioners) are being equally discouraged from spending because their income from savings are reduced, and these typically older consumers are less likely to have jobs and have fewer outlets or will to spend it anyway since the economy has increasingly tilted towards retail and the youth economy in the past several decades.

    What we need is a system of repurposing regional economies across the country which provides investment opportunities to create private sector jobs in areas away from London.

    National policy is currently geared towards policy decisions which favour London-based economies such as financial services. If we wish to successfully rebalance the country’s economy then we must enable centres of manufacturing to develop by encouraging the innovation which comes by investing in research and retooling where costs of land and living are lower.

    Restructuring the Back of England’s independent remit to turn its current monthly diktat on national inflation (and therefore reflecting average growth across the nation) into a mechanism to free up growth potential around the country in more deprived regions will unlock demand by attacking regional inequality.

    Providing regions with their own interest rate varying powers and the means to unlock localised bond markets will stimulate businesses and put into reverse the outrageous growth in economic geographic inequality suffered by places like the Midlands, Yorkshire or Teeside since the decline of older traditional industries.

    It’s not only good economic sense and desirable socially in equal measure, but it can be justified politically only by LibDems because of the geographic divergence into urban/rural and northern/southern parties of Labour and Conservatives alike.

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