Tag Archives: Osborne

Blue-rinse budget

The budget presented by George Osborne this week was as concerned with politics as economics. Ironically, given Osborne’s professed loathing for him, I think it also had much in common with Gordon Brown’s later budgets. Remaining (supposedly) fiscally neutral whilst shifting monies around in a way that benefits your target voters – a fiscal carousel with some sweeties thrown to one side and pebbles to the other.

 

The political motivations for the budget are, like so much Tory posturing of late, compelled by their fear of the UKIP threat. The reforms to pensions and ISA’s are squarely aimed at the Home Counties grey vote. This key Tory demographic is the vote that they fear is being lost to the Farage’s golf club bonhomie and supposed straight-talking.

 

The pension reform is a massive decision. I am sympathetic to the argument that people should be allowed more freedom and choice in how they deal with their own affairs in retirement. The annuity market at present is also not working in the way one would wish.

 

My concern stems from several things. Firstly, governments’ track record in pension reform is about as successful as Grant Shapps’ tweets. The fact that this policy has been rushed out for the budget is rather worrying given that it has extremely long-lasting implications for the public finances. This is clearly a policy that should have been subject to the utmost scrutiny as opposed to scribbled on the back of Osborne’s fag packet.

 

Secondly, it must be borne in mind that there is a difference between a pension and savings. The state has offered favourable tax treatment to promote pensions as it means the person saving for their pension will not have to be overly reliant on the state in their dotage. The liberalisation of pension access does raise some questions over this incentive and what happens if the person who accesses their pension early is left, for whatever reason, reliant on the state?

 

Thirdly, without proper regulation there could be a lot of room for many sharks in this brave new world and people could lose catastrophically. It is worth remembering the grotesque mis-selling scandal that arose from previous pension reform.

 

It seems the government has rushed out a policy for headlines when it should have been more thoughtfully implemented. The decision is underpinned by a belief that personal choice is always beneficial – this assumption should have received greater scrutiny than appears to be the case. Choice can be beneficial but only within the right framework and I remain far from convinced that sufficient work has gone into developing the framework for this far-reaching decision.  

 

The liberalisation of ISA’s is also fundamentally not a bad thing. To encourage savings at a time when the household savings ratio continues to dwindle is reasonable. My concerns here are the fact that it flies in the face of previous policies. This suggests it is not borne of entirely pure motives. More importantly, it is ultimately irrelevant to the vast majority of people who are not in a position to utilise this offer. It is like granting people permission to fly to the moon – it would be nice but is meaningless to most people. The government would be better off focussing resources on policies for the majority.

 

It would argue that raising the personal allowance is the way in which it is helping ordinary people. This is partially true. The raising of the allowance beyond this point does not affect the lowest earners. The lowest paid 5 million workers earn less than £10,000. To truly alleviate the tax burden on the low paid the national insurance threshold should be raised.

 

What is perhaps most worrying though is the chancellor’s willingness to engage in a grand form of temporal teeming and lading. He is handing out actual tax cuts happening now that are being opaquely funded by unspecified future spending cuts. This makes it likely that the cuts when they come are going to have to be even deeper and more painful than anything that has happened as yet. The social ramifications of this could be enormous. If one adds to the mix asset price comedowns as the Bank of England unwinds quantitative easing then the overall picture remains troubling.

Steady as she goes?

The autumn statement gave George Osborne the opportunity to bask a while in the warm glow of improving economic performance. The aftermath has also seen an increase in pressure on his counterpart in Labour, Ed Balls. The Tories are keen to present an image of ‘steady as she goes’ in order to enable an electoral message of Labour endangering the recovery. I expect this message to be repeated mantra like in the run up to the election.

There were a few sleights of hand in the Gordon Brown style – giving a break on green levies here whilst simultaneously taking these from general taxation there but there were no give-aways beyond those trailed long before the statement.  I imagine next year will be different as we see some tax morsels dangled before the electorate. Beyond the national insurance break on youth employment there is little to applaud in this statement.

Two things have gained in clarity as a result of the statement. The first is the commitment to an ideological austerity in order to tear up the social contract that has remained broadly in place since the Second World War. This has been brilliantly elucidated upon by Will Hutton. The second is that Osborne seemingly sees no need to tackle the fundamental flaws in the foundation of the present recovery. The philosophy of steady as she goes thus becomes a rather baffling reluctance to acknowledge any weakness in our current economic model.

One issue arising from the first point is that the government is guilty, again (cf. NHS, education etc), of misstating its intentions to the public. Austerity was presented as an unfortunate and unwanted result of the economic crash. The government needed to become more like the prudent housewife and get its books in order. What we will see instead is a shredding of public expenditure if the Tories are given free rein.

The inherent weaknesses in the economic recovery and Osborne’s reluctance to tackle the issue is perhaps more surprising.  The current recovery will not benefit most people. Median incomes (as per the IFS) will continue to fall for the next couple of years. The recovery, such as it is, is based on increasing asset prices propped up by several factors including the continuation of quantitative easing, low interest rates, a housing bubble exacerbated by shortage of stock in key areas and a growth in demand fuelled by personal debt.

Private investment is still 11.6% below its pre-crash peak in 2007. This continuing slump in private investment will serve to negatively impact productivity and thus contribute to continued wage stagnation. In such circumstances any growth in demand in is likely to come from an increase in personal debt. Whilst the public worked towards deleveraging in the past few years the purse strings have loosened once more. This is exacerbated by increasing asset (particularly house) prices which further encourage this profligacy. Osborne has enacted very little to promote the investment required in order to make the country more productive. Instead he has fuelled demand with commitments such as help to buy.

Similarly public investment (in line with the ideological austerity) continues to be neglected. For electoral reasons the government has all but abandoned one ‘spade ready’ project in Heathrow and HS2 looks as though it will be shunted to the sidings. Beyond that the government continues to do little to invest in housing stock or the country’s general infrastructure.

With no attempt by the government to recalibrate the economy the recovery remains worryingly vulnerable to externalities. Another crisis in the Eurozone would unbalance the recovery even further for example. Continuing problems in the Middle East or a conflagration with Russia due to the situation in the Ukraine are all events that could send shockwaves worldwide and blow away the froth of the British recovery. The lack of any substantive attempt by the government to refocus the economy only serves to accentuate this issue.

Links:

http://www.ons.gov.uk/ons/rel/bus-invest/business-investment/q3-2013-provisional-results/stb-business-investment-q3-2013-provisional.html
http://www.ifs.org.uk/publications/5517
http://www.theguardian.com/commentisfree/2013/dec/08/george-osborne-spending-cuts