Osborne’s Budget 2014: The Good, the Bad and the Ugly

With the fiscal situation still tight, and a year to go before an election in which the Chancellor will accuse the opposition of fiscal profligacy, it was never likely that this was going to be a particularly exciting budget – and so it proved. Overall, it’s difficult not to conclude that the Chancellor has missed a great opportunity in this Parliament for fundamental tax reform and reshaping the scope of the British state. The decision to not cut more deeply in 2011 when the OBR outlined that the public finances were much worse in structural terms means that much of the remaining consolidation is now pencilled in for the next Parliament, with all the risks that a change of government brings for deficit reduction. It’s not beyond the realms of possibility that Labour, for example, might decide to raise taxes again post-2015, which would damage economic growth.

Indeed, for all the talk of the measures today, the key take-home should still be that we have borrowed £108billion over the last year. The structural deficit is still at an unprecedented 5% of GDP – unthinkable just a few years ago. And digging through the Office for Budget Responsibility’s report suggests that the underlying state of the public finances might be worse still. Using two methods, the OBR thinks the spare capacity in the economy is pretty much zero. This would imply that the structural deficit is higher than the government has claimed. But, sparing the government the embarrassment of needing to announce the need for more spending cuts, the OBR just assumes that its own calculations are wrong. Although growth is forecast to be much stronger then, the underlying fiscal problem is still there, and may have even deteriorated.

What of the policies announced today? First, the good. The personal allowance increase is a welcome tax cut and brings us a step closer to taking those on the minimum wage out of income tax altogether. Abolishing the alcohol duty escalator, a highly regressive measure, will ease living costs for drinkers. Allowing people access to their pension pots and making ISAs more generous will increase the saver’s freedom. And the expansion of the annual investment allowance will help business investment and helps correct for some problems in capital markets.

Second, the bad. Again the Chancellor has decided to increase the 40p threshold by 1% (less than the rate of inflation). The Chancellor likes to claim that someone on, say, £45,000 will pay less tax overall because of the more generous personal allowance. But of course, most people see nominal wage increases and prices are increasing. According to the figures in the Budget, someone earning £45,000 this year would earn £46,125 next. The combined effect of the increase in the personal allowance and the 1% increase in the 40p threshold would still see them paying more tax next year, and more tax as a proportion of their total income. The government should have announced above inflation increases in the thresholds for inheritance tax, stamp duty and the higher rate of income tax to begin to compensate for years – or decades – of under-indexing. This could have been financed by the reversal of misguided spending commitments on childcare and also by not reducing the starting rate of tax for savers. In other policy areas, the Help to Buy scheme should have been abolished, rather than extended and government subsidies for childcare should be reduced, rather than increased. In both these areas, the key reasons for high prices are planning laws and regulations – supply-side problems – which cannot be solved by government subsidising demand.

Finally, the ugly. The government decision to introduce a new pension bond means that the government will be borrowing at above market rates and competing for capital with the private sector. In a range of others areas the Chancellor has complicated the tax system by carving out exemptions for various industries or sectors – in some directly taxing more heavily growing industries (fixed odds betting terminals), and reducing tax on failing ones (bingos). This seems to suggest the Chancellor sees the role of government to ‘stimulate’ failing sectors, which has been tried and failed in the past. On energy policy, the government is now having to compensate for the effects of its own green energy subsidies and carbon prices, which have made energy more expensive. And lots of the money that the Chancellor aims to get back to pay for many of these measures is forecast to come from extra revenues from clamping down on tax avoidance – in other words, it is very uncertain.

All this though should not detract from the big picture. Britain is still living beyond its means, and the next Parliament is going to require significantly more fiscal consolidation and reform to both get the budget back to balance and get our longer-term debts under control.

This article originally appeared on the Huffington Post.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.