When George Osborne first became Chancellor I was envious. I don’t usually want to be in charge of the nation’s finances (even the tiniest bit), but when he announced his emergency budget in June 2010, I said that I would like to be him “for one week and one week only”. Why? Because, given the economic car crash that was Gordon Brown’s government, he found himself with a platform from which he could make proper, bold changes to the way Britain’s finances work.
I don’t envy him anymore – who’d want to be sitting atop an economy running non-stop multi-billion-pound deficits, rising unemployment and 5%-plus inflation? But I am nonetheless still reasonably impressed. He has stuck to his guns on what the FT calls his “audacious” mixture of tight fiscal policy and loose monetary policy. That’s despite having to downgrade his growth forecasts; despite the (perfectly reasonable) pressure on the Bank of England to raise rates now that consumer price inflation has hit 4.4%; and despite the growing popular awareness of falling real incomes. That’s quite a gamble.
He has also addressed the issue of overly generous and costly (to the taxpayer) public-sector pensions. He is working on saving the low-paid from their current cycle of paying income tax and getting it back in benefits (by raising the basic rate threshold). He has confronted the complications of the benefits system and risked the wrath of today’s pensioners by putting in motion the flat £140-a-week state pension for future pensioners. And he has signalled support for big business, by cutting corporation tax, and for small firms by doubling Entrepreneurs’ Relief. His budget this week wasn’t perfect, of course – for all the talk of simplification he managed to make enough minor changes to be still talking after an hour, for starters.
However, among all the details he announced something well flagged but still interesting – the possible merging of national insurance (NI) and income tax. The financially literate can’t see why, beyond saving a little admin expense, this is a big deal. But it is. Whether you think they should or not, most people have no idea the basic rate of tax is 31% and soon to be 32%. And they also have no idea that at the very top people will soon pay 52%. Most governments would prefer to keep it that way by keeping up the Ponzi-style pretence that NI is not a tax but a contribution directly made to health and pensions.
I spoke to a former chief secretary to the Treasury this week. In his day, he said, they often considered combining the two but thought no one would ever do it. If you want to go down in history as a reformer, you do radical things to tax systems, he said. If you want to stay in office, you don’t. This week’s Budget was mainly pretty dull, but look at it like that and, even if the two taxes don’t end up completely merged, it was quite brave too.