Budgets are usually about small surprises and “managing relatively small overdrafts”, said The Guardian. But this one was “of a different order of seriousness”. 2009 will be the worst year for growth since the war, and the government faces a general election next year. Yet never before in peacetime have the public finances deteriorated this sharply, and Chancellor Alistair Darling had to produce a credible medium-term plan to steady them to avoid a gilts strike (whereby foreign investors stop buying government debt). In short, he had “as much room for manoeuvre as an elephant in a minivan”, as The Sunday Times’s David Smith put it.
An ocean of red ink
“Borrowing, borrowing and more borrowing,” said Chris Giles on FT.com. Darling announced that this year the Government will borrow £175bn, equivalent to a deficit of 12% of GDP; next year the figure will be £173bn and in 2013-14 still £97bn. Debt as a percentage of GDP will soar to 59% this year, rocketing to 79% by 2013/2014 before easing. These figures are based on very optimistic growth projections: a decline of 3.5% this year will supposedly be followed by growth of 1.5% in 2010.
Yet all the evidence is that recessions accompanied by financial crises are deeper and recoveries slower than usual, as Stephanie Flanders said on bbc.co.uk. One key problem is that highly-indebted households are likely to be working off debt for years, implying weak consumer spending. Capital Economics reckons debt could reach 100% of GDP by 2012. The gilts market is already nervous; prices fell on Wednesday after it emerged that sales will total £220bn this year, far more than forecast. “If gilt sales go badly, what seems like a difficult decade today will be a genuine crisis tomorrow,” said Giles. The Chancellor’s forecasts, said KPMG, are a “triumph of hope over experience”.
Taxing the rich
That would seem to apply also to another eye-catching feature of the Budget. “Stealth taxes are out and hikes for the rich are in,” as Nick Robinson put it on bbc.co.uk. From next year, there will be a new 50% income-tax rate for anyone earning over £150,000. The year after, the latter will be hit by a reduction in pension tax relief. But soaking the rich merely encourages tax avoidance, thus lowering revenue. The government itself calculates that it will gain around £1.2bn from the new top rate of tax and the pension clawback. That’s marginally less than its increase in fuel duty will yield.
On the spending side, Darling hopes to cut real public spending growth to just 0.7% a year from 2011 and has increased his annual target for Whitehall efficiency savings to £9bn a year from 2013/2014, up from £5bn. But the last supposed cull of civil servants three years ago wasn’t exactly a roaring success, and the public sector unions “have the Labour Party in an armlock”, said Martin Vander Weyer in The Daily Telegraph.
The horrifying borrowing figures and revival of Old Labour overshadowed the various schemes to alleviate the downturn – “fairly modest initiatives which do not necessarily make up a coherent plan”, said Stephen Barber of Selftrade. For instance, the government is hurling another £1bn at the sinking housing market, including an extension of the stamp duty holiday on properties worth up to £175,000, which is of little use given that buyers are wary of further house-price falls and credit conditions remain tight. Finally, good news: next year the ISA allowance rises to £10,200 from £7,200.
Main budget measures
• The child element of the Child Tax Credit will rise by £20 from April next year. Parents will receive £100 extra in child trust fund vouchers for disabled children, taking them to £350.
• £500m extra support will be provided for the housing industry, with £100m for local authorities to build energy-efficient homes, and £435m for energy-efficiency measures for homes, businesses and public places.
• Main capital allowance rate to be doubled to 40% to encourage firms to bring forward investment. Loss-making companies can now reclaim tax paid on profits made in the past three years.
• Income tax will not rise for most this year, but those earning more than £150,000 will see an increase from 45% to 50% from April 2010.
• Fuel duty to rise by 2p/litre from September, and by 1p/litre every year for the next four years. Alcohol and tobacco duties upped by 2% immediately.
• Pension tax relief to be restricted for those on incomes over £150,000 from April 2011. It will be gradually tapered to 20%.