There was plenty to welcome in George Osborne’s budget, from the proposed corporation tax cut to scrapping the 3p fuel duty rise. But to read Jonathan’s seven-graph summary is to realise that Osborne’s 2010 plan is not now enough. I look at this in my Telegraph column today. Here’s a festive summary of my pain points:-
Osbrownism – the ghost of Christmas Present
Osborne’s words – tough on deficit, dealing with debt – are very encouraging. The figures: not so much. The main features of Osborne’s plan are identical to the Brown plan he inherited.
· Slow-motion deficit cuts (Francis Maude on Question Time last night boasted about cutting deficit by 25% so far; the Brown plan he once rubbished involved cutting it by 33% by now)*
· Capital spending (infrastructure, etc) halved, to protect current spending (jobs, etc)
· Moderate spending cuts, averaging about 2.5 per cent a year
· A 60 per cent increase in national debt
· Increased higher rate of tax, not to raise revenue but a stunt to make the cuts palatable (Brown’s ‘temporary’ 45p, later 50p, is now a permanent 45p)
· Debt made artificially cheaper using QE, and used as a growth tool.
· Everything planned out using five-year plans (that become out of date after five months).
Osborne is, of course, running the same HM Treasury with its institutional aversion to radical thinking and supply-side economics. It’s different decorations, but the same Christmas tree – and the needles are falling off fast. In June 2010, Osborne’s ‘Tinkered Darling’ plan seemed enough. No longer. What’s changed is not so much the Eurozone crisis (that’s been far better than expected this year, ask John Paulson).
The ghost of Christmas Past: What’s changed is our better understanding of the depth of the hole we are in, and how much of the old stability was a debt-fuelled illusion. Economic history is, even now, being rapidly rewritten. The IMF only now tells us that 2007 was up there with 1989 in terms of crazy overheating of the economy.
The ghost of Christmas Future: graphs say a thousand words.
We are already in a Japanese-style lost decade. This isn’t the bleakest scenario: you can look at Tullett Preborn for that.
Osborne is a formidable talent; just last week he snatched Mark Carney from under the nose of the Canadian government to be our Bank of England governor. His tax cut stopped an election in 2007. He is a politician of flair, imagination and resolve, and even he will realise Britain’s on a road to nowhere.
So what to do? Here’s my six-point plan:
1) Reject the fatalistic idea that Britain is doomed – that, just because the Eurozone is in the mire, there’s not much we can do. If tiny Estonia can grow in these circumstances by adopting different policies, then so can Britain.
2) Focus on youth unemployment. Yes, Britain’s jobs market has done okay but most of the rise in employment is accounted for by foreign-born workers. A million young people are on the dole, and this is a huge waste of young talent was well as money. This ought to be treated as a national emergency.
3) Focus a growth policy on helping the low-paid. The Swedish experiment found that if you make sharp tax cuts to low-paid workers, it can have a stunning effect. Research from the OECD suggests that tax action on low-paid workers is the single more effective form of stimulus for countries with generous welfare states. This can be done many ways: reducing National Insurance, cutting employers contribution or even German-style mini jobs (that I wrote about earlier)
4) Be careful about cutting those tax credits World over, people are proving more sensitive than you might think to work incentives. The Swedish tax cut that I’m so fond of citing was transferred via an Earned Income Tax Credit. It made then 8pc net better off a year, allowing the government to say “You now get the equivalent of an extra month’s salary every year”. A message strong enough to have the Conservatives re-elected for the first time in Swedish history. My colleagues at the CPS spotted the potential of this in 2006 (pdf).
5) Fund the tax cuts from savings in still-huge state spending It’s not even 3 per cent lower than its peak – the same government machine that grew by 61 per cent under Labour. And the £26,000 welfare cap can be lowered, if it helps the low-paid and tilts the bias back towards work.
6) Make it a cross-party mission. Helping the low-paid should be the ideal coalition task, as the Lib Dem manifesto promises action on the lowest-paid workers. The most influential economists on the left, such as Jonathan Portes and David Blanchflower, also back tax cuts for the low-paid. A consensus is fast taking shape.
Youth unemployment is becoming a national issue. Two years ago, it looked like it was enough for Osborne to tinker with the Brown model. No longer. He has about four months until his next Budget – and he has a choice. To give in to the above graphs, or to reject them. To shape our economic future, or grimace and say there’s nothing he can do (except dream up ways to be rude to Ed Balls). It isn’t much of choice. The OBR’s pictures of Christmas Future leave us in little doubt about what awaits Osborne – and Britain – unless he comes up with something good soon.
*Footnote: A key aspect of Osbrownism is the leisurely deficit-cutting timetable. Rather than cut ‘too far, too fast’ Osborne is going gently — which may yet cost us our AAA rating. One method of spinning the progress is to say ‘we have got rid of 25 per cent of the deficit’ — focus groups like it (they hear ‘debt’). But it’s worth remembering that Brown’s plan involved cutting the deficit by 33 per cent by now.The two deficit plans are below. Yes, Osborne is facing stronger headwinds. But I’m not sure ministers should expect applause when they use the 25 per cent figure now, given that they so loudly booed Brown for a more ambitious deficit plan.