Archive for March, 2012

Reflections on the budget

It is often said that if a Chancellor’s budget is cheered on delivery the next day it will be given the thumbs down. 

Many now see this budget as one for the fat cats.  

A close look at the small print of the budget contained in the red book showed  it barely changes  the country’s public finances. The rule that the chancellor has adhered to is, what he gives in taxes will be balanced with taxes that he takes. Hence, the economist’s jargon of a fiscally neutral budget.

Just like any household with no change to their income what becomes interesting is what they prioritise. And just so, with young George Osborne’s effort. 

His budget showed very clearly what his priorities are. Help to businesses and to the rich. 

Business was helped with lower corporation tax. This was done in the hope that the action would make Britain an attractive place to do business.  But will international businesses be rushing to our door with inward investment? Unlikely. 

Evidence shows that inward investment decisions are not usually made on tax rates. What the international entrepreneur looks for is a work force that is educated and well trained  and an infrastructure that is capable of getting their goods to market quickly, cheaply and efficiently.  

Yesterday little was said about increase sums for education . Indeed the talk was of further public expenditure cuts and of course the big story on infrastructure is that the much criticised private finance initiative is back in vogue. 

Despite PFI being costly to the public purse in the long term it provides a quick fix if the government does not want to immediately invest. 

Cutting corporation tax is hardly likely to act as the stimulus to get the economy moving  and reduce the 2.7 million that are unemployed. Neither, for that matter will cutting the the taxes of the rich stimulate economic activity.

A political budget is what we’ve had. But is it good politics. Well, certainly the budget will not have harmed George Osborne’s prospects within his own party. He will be seen as the authentic voice of Conservatism. 

But you don’t win elections by playing to the prejudices of your own supporters. Even when those supporters donations pay such an important part in the running of your party. 

Being seen to be the party of the rich won’t make you popular with the voter especially when it gives more cash to bankers that already get £5 million pay packets.  And especially not, when it seen as being at the expense of the frugal pensioner.

Like a poor magician the Chancellor’s slight of hand on pensions has been seen by the audience. Nothing worse than a trick that’s gone wrong.

To give taxes to the rich and make pensioners pay more to the Treasury this ain’t good politics in anyone’s book. The rush to the airwaves today shows that they’ve realised what a major blunder they’ve made.

You can cut back on welfare payments and get away with it. But to take away from the grey voter whilst be seeing to give to your chums is bad politics indeed. It sends all the wrong signals. 

A point that Ed Miliband was quick to latch onto. The message he’s quite keen to get over is that we’re now not all in it together. Incidentally, his performance certainly was his best to date. Who knows, his party might not dump him before the next election if this form continues. 

It’s the rich that gets the pleasure and the poor? Well, this budget answers that.

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Budget time

‘Public Sector Net Borrowing in February 2012 was a deficit of £15.2 billion, £6.3 billion higher than in February 2011 and a record net borrowing for February.’ So said the Office of National Statistics(ONS) on the morning of Mr Osborne’s budget.

What does it mean? Well, It is the size of the country’s debt. But just like household debt when you’ve in the financial mire your options close. So this high PSNB means the Chancellor has very little wriggle room in this budget. 

It is a bit of a shock to those economists who’d been pushing the line that the Chancellor’s policies had been working and that UK borrowing for this year would be lower than forecast. This morning’s figures show that there will be very little if any undershoot. Never trust optimistic economist’s, it’s not called the dismal science for nothing.

Predictably traders panic and suddenly the pound drops sharply. At the time of writing half a cent against the US dollar to $1.584.

So within the tight margins that he had available, how did the Chancellor do?

Well, he styled himself and his budget as championing business, and indeed with corporation tax heading for 22p over the next three years he certainly is entitled so to do.The rate was already due to decline to 25% this year; it will now fall to 24%, and there will be a further two 1p cuts in the years ahead.

That he needs to help business grow is clear with economic growth only 0.8% this year and only a projected 2% growth next year. This is down from, the 2.1% he said in November.

But the real political nub of the budget was the controversial decision to cut the 50p top rate of income tax for those earning more than £150,000 a year. Although he maintains that the money lost by lowering the top is clawed back rate by clobbering buyers of £2m homes with a new 7% band of stamp duty.

Now this gives Mr Miliband a very useful stick to beat with which to beat the government. He was quick off the mark to accuse it of being a “millionaires’ budget.’  

His performance was his most effective to date, mind you with the coalition government having leaked so much of the contents he was given plenty of  material to prepare his attack. 

So the usually opposition cliches came out. The budget was “unfair, out of touch, for the few not the many” and was based on the “wrong choices, wrong priorities, wrong values” from the “same old Tories”.

But the cut in Corporation tax gave him the open goal to aim at. He was able to point out that most top earners would be “totally unaffected” by the rise in stamp duty because only around 4,000 homes worth more than £2m are sold each year.

As for Wales an enhanced capital allowance  for the Deeside Enterprise Zone and ultra-fast broadband for Cardiff don’t amount to the kind of boost that the Welsh economy need. Hardly enough to compensate for the threat to pay in the public sector that the Chancellor is threatening with regional pay. 

The UK Government  also promise to work with the Welsh Government to consider the electrification of the Cardiff Valley rail lines now this would give a much needed boost to the economy if it was to be agreed and started up soon. 

Meanwhile Plaid Cymru’s new leader Leanne Wood AM has announced the formation of an Economic Commission which will develop the party’s vision for the Welsh Economy over the coming decades.  And guess who’s to chair it?The former Plaid Cymru MP Adam Price and one of Leanne Wood’s major backers. 

Final thoughts on the budget. The chancellor will have become the darling of his party by delivering a tax cut. His chances of being the next leader should Mr Cameron leave the stage are greatly enhanced. Tory chancellor’s who deliver tax cuts always win the hearts of party members.

But he will not win the hearts of the country if Miliband’s attack sticks. For the country is hardly likely to reward him if he’s seen as only helping his chums the rich. 

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On the road

David Cameron has a cunning little plan to lease out the English road system. What he wants are countries such as China through sovereign wealth funds to lease bits of roads and motorways to improve and maintain the road system.

The idea is that these new road companies would be set a series of targets to reduce hold ups and improve the roads they’re responsible for. In return the companies would get a cut from the vehicle license revenue. 

Indeed what was known as the road fund license would really become just that. It would be a form of hypothecation, meaning the revenue raised in the tax would go to a specific end, in this case roads. 

Hypothecation is normally resisted by the Treasury, they like to get their grubby little paws on all taxes, to do with, as they will. 

Clearly such is the desperation of government with the state of the infrastructure that both the Prime Minister and his Chancellor have lent on Treasury officials to get them to drop their objections to such a tax.

So if Cameron gets his way the good workers of Swansea’s DVLA will be raising money that ultimately goes into the coffers of the Chinese state. 

Why? Well, it was only but recently that the Chancellor took his bags to China to persuade them to invest their cash surpluses in infrastructure schemes in the UK. This latest wheeze by  the Prime Minister is just an added project to the ever growing list of infrastructure projects that government want outsiders to fund.

The government has to go down the humiliating route of asking a foreign government to bail it out because the country’s infrastructure is crumbling. 

The chronic under investment in the past means that the UK just can’t compete. It is now dawning on the government that a great deal of investment is needed.  It is ideologically opposed to public investment which leaves it no choice but to go cap in hand to the Chinese for their cash. Nothing is for nothing, so in return they get a stake in our roads. 

And if, as is likely, these companies start adding new lanes and even new roads to reduce congestion then  tolling will enevitably follow.

But roads and transport are devolved so this will only apply to England. True but Wales  and the Welsh will be greatly affected. 

Quite apart from the fact that many journey to England on a regular basis and our trade links are cross border. There is the little matter of our old friend Barnet and his consequentials. 

The more the private sector takes over the burden of investing in the transport system in England the less the UK government has to put of its own cash. Consequently, the Department of Transport gets less cash from Treasury and the old Barnet formula kicks in with Wales’s bit of the cake going down too. 

So less cash for Carwyn Jones to spend. Either on roads or any other pet scheme of his.

God knows, if England’s infrastructure is not fit for purpose what can be said about Wales’s. 

No track of rail electrified. Very few  miles of road with dual carriage ways. A third world  airport that the First Minister describes as a disgrace. 

Wales needs projects galore to just get it to twentieth century standards let alone equipping it for the current century.

To do so, our politicians may also have to think sovereign funds, and take not the long boat to China but a plane ride there. But not from Cardiff.  

Socialist ideology goes out, to get communist money in. There’s irony there, somewhere.

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