Wednesday, 20 March 2013

Budget 2013 - not a budget for growth

It isn't the "omnishambles" of 2012, it isn't radical, but it is a steady programme of slight reductions in spending across non-ringfenced budgets, a few tax cuts, and some tax increases.

So what matters, and what doesn't? 

The big picture is that the budget deficit is high, very high.  The myth of cuts and austerity should be obvious as spending has not dropped, and not because of a blowout of welfare benefits due to unemployment, as some on the left claim, it is simply because spending cuts have been modest, and are more than offset by real increases in spending on the NHS, overseas aid and schools.

Only an Opposition politician or hardened socialist would think that George Osborne is some great slasher of the state.  He's not, he's stemmed the growth of it, but given that there will still be a budget deficit in 2018.

There are 67 individual measures listed in the Budget.  I'll only discuss those with implications of more than £100 million a year, which means 24.  I'll rate them as being highly positive through to highly negative for economic freedom and a smaller state.

  • Elimination of contracting out of national insurance (split between employer, employee, public and private sector categories):  This is due to the introduction of the "single tier" state pension, and means that because the pension will not depend on contributions for an additional tier, nobody will be able to choose to "opt-out" of paying a portion of national insurance by having a private pension.  It is a tax increase, by forcing everyone to contribute to a larger state pension, and reduces the propensity to save for one's own retirement. Worth over £5.2 billion a year in extra tax revenue by 2018. Highly negative.
  • Inheritance tax threshold freeze: Means inflation effectively widens those eligible to pay inheritance tax.  A tax increase based on envy. £170m a year by 2018. Moderately negative.
  • Social care funding reform:  Subsidies for social care to ensure no one pays more than £72k towards social care.  Expansion of the welfare state encouraging state dependency. £1b a year extra spending by 2018. Highly negative.
  • Higher childcare subsidies: 85% of childcare costs to be paid for those eligible for the new Universal Credit.  £750m a year extra spending by 2018.  Encouraging growth in childcare costs and state dependency.  Highly negative
  • National Insurance £2000 employment allowance: £2,000 allowance for all businesses and charities to offset against National Insurance bills.  Effectively a small tax cut for business.  £1.725b a year less tax by 2018. Moderately positive
  • Corporation tax cut to 20%: 1% cut to 21% in 2014 and another 1% cut in 2015.  Straight out cut in corporation tax.  £865m a year less tax by 2018 Moderately positive
  • £3 billion capital spending increase per year:  Self explanatory, more state spending on "capital". Details to come in June.  This could be roads, railways, state housing, hospitals or schools. Whatever it is, it will crowd out the private sector role.  It could be money for unproductive capital or it could be for road maintenance (which is high value, low political profile).  I'll be generous and say Moderately negative
  • Stamp Duty Abolition of Schedule 19 charge: Basically removing stamp duty on sales of units in funds, which has effectively encouraged such funds to be domiciled offshore to avoid the tax.  This is a positive removal of a punitive tax that is expected to actually generate much more tax revenue through the fund itself, than the stamp duty. Reduces tax by £160m a year by 2018 Moderately positive.
  • Abolition of Stamp Duty on shares in companies on the Alternative Investment Market and ISDX Growth market:  Be better if it was in all shares, but be grateful for small mercies.  It is a small additional incentive to invest in high risk new companies.  Good.  Reduces tax by £175m a year by 2018. Moderately positive.
  • Industrial strategy: £180m a year in subsidies to businesses.  Picking winners with the taxes of everyone.  It includes money for the aerospace industry, but other industries will win a bureaucratic beauty contest later this year (including agriculture and automotive sectors).  Could have cut corporation tax by another 0.2% for this, for all business.  Moderately negative.
  • Bank levy increase:  Up from 0.13% to 0.142% on the assets of UK banks.  Pure populist bank bashing that hurts the financial services sector and reduces the propensity of banks to hold assets in the UK.  An extra £250m in tax.  Moderately negative.
  • Increased income tax free personal allowance to £10,000:  Taking more people on the lowest incomes out of income tax.  Good. It also will increase by the CPI in 2016. A cut in tax of £1.2b a year. Highly positive
  • September fuel duty increase cancelled:  Not allowing fuel duty to increase in line with the Brown Government's plans of 1.89p/l.  Good, there is no justification for continuous increases in a punitive tax that largely is paid by road users, with no benefit to them.  It isn't a tax cut though, it is reversal of a previously planned increase.  A cut in forecast revenue of £900m a year by 2018.  Moderately positive
  • Beer duty cut and abolition of beer duty escalator:    A cut of £205m a year by 2018.  General beer duty cut by 2% with future increases in beer duty at the RPI only.  However, wine, spirit and cider taxes to rise by RPI + 2% as previously indicated.  Barely moderately positive (and only because the abolition of the beer duty escalator looks like a "saving").
  • Tax agreements to increase revenues from Jersey, Guernsey and Isle of Man: Expected to be £170m of more tax revenue from new disclosure arrangements so HMRC gets confidential information from those jurisdictions.  Pure grab of tax.  Moderately negative
  • Targeting limited liability partnerships as a tax avoidance instrument:  £285m a year in extra tax by 2018, from oppressing businesses using partnerships to reduce tax liability legally.  Another tax grab.  Moderately negative
  • Targeting corporate loss buying:  Clamping down on companies buying the losses of other companies to reduce tax liability.  £190m a year in extra tax by 2018. Moderately negative
  • 1% spending cut for many government departments: It is a one off saving, reducing spending by £2.3b over two years.  It doesn't apply to health, schools, local government, HMRC or police budgets.  Highly positive although it all gets spent on new capital as mentioned above.
  • Official development assistance budget cut:  This is a funny one.  Because the aid budget is meant to target 0.7% of GDP and GDP is not rising as much as is forecast, neither will the aid budget.  A saving of £305m a year by 2018, which is actually a reduction in spending growth. Barely moderately positive
  • Special reserve budget cut:  £300m set aside for spending on Defence in Afghanistan is cut from the special reserve budget.  A one off reduction. Barely moderately positive
Beyond that there is the housing bribes, the extension to right to buy to a £100k discount for buying ones council home in London isn't expensive, costing only £50m a year.  Frankly, getting more homes out of state ownership is a good thing.

"Help to buy" is a subsidy to buy homes.  The state will lend anyone up to 20% of the value of a newly built home, and a mortgage guarantee will be provided for those with small deposits.  Properties up to £600k can be bought with this subsidy.

The equity loan means if you have a 5% deposit on a new build home, then the state will lend you 20% so you effectively only need a mortgage for 75% of the property value.  The loan is interest free for five years, beyond that it will be at 1.75% interest with every subsequent year it increasing by inflation + 1%.  That could get expensive.

The mortgage guarantee applies to anyone wanting to buy a home, new or existing.

The effect will be to encourage new builds, but it wont address the supply side issues of planning laws and urban growth boundaries.

The real answer to housing costs is supply, which would be greatly eased by scrapping the 1940s centrally planned philosophy around property replacing it with common law based property rights, and abolishing the misguided policy of intensification which tradeoffs housing space and costs for esoteric targets of emissions.

These measures will raise the price of new build houses, and make a modest difference to supply by incentivising some new build, but it wont address the massive planning and land supply constraints.

In conclusion, this isn't a budget that will do much for growth.  It wont harm it, because there are enough mildly positive measures in it, but it wont unleash a flood of entrepreneurship and investment, and it wont tell the world the UK is serious about being friendly towards business and towards the generation of wealth.  

It maintains modest savings in spending, for modest tax cuts.  It isn't enough either to kickstart the economy, nor, I suspect to save the next general election for the Conservatives.

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