How should we evaluate the budget?

Regardless of what Liberal Democrats might like the budget to be tomorrow, we always knew it was going to be a compromise between the Lib Dems and Conservatives in government. The Parliamentary arithmetic always meant that the Lib Dems’ game plan in coalition was restraining the Tories rather than getting them to abandon their policies altogether.

So the issue with the rumours and hints that have been flying around over the past few days is not that the party isn’t winning the argument, but that the budget that seems to be emerging represents a total abandonment of Lib Dem policy. Will it be all that bad however? The key question will be: will we be able to clearly demonstrate that this budget contains elements within it that a pure Tory budget would not?

How do we assess that however? Here are a few ideas:

  • What is the timescale? If George Osborne announces a clear intention to clear the structural deficit over the lifetime of this parliament, that is a definite Tory victory. The Lib Dems’ argument was always for something closer to halving the deficit over five years.
  • What is the proportion of cuts to tax rises? Again, the Tories were quite clear on this: £4 cuts for every £1 tax rise. Labour went into the election calling for £2 cuts for every £1 in extra taxes. The Lib Dems, it is fair to say, hedged it, but did include a clear commitment to raise taxes if spending cuts alone would lead to greater unfairness. It is hard to conceive how 80% cuts could possibly pass this fairness test – especially since the government appears to be working towards an even greater deficit reduction than even the Tories were pledging to do during the election.
  • What kind of tax rises? Of the Lib Dem’s main tax pledges, only the banking levy, the plane levy and the harmonisation of Capital Gains Tax survived the coalition talks. The hints are that the banking levy announced tomorrow will raise somewhere between the Tory plan for £1bn and the Lib Dem plan for £5bn. CGT harmonisation, again if the rumours are true, looks as if it will be neutered. VAT is being talked about, although in recent days the speculation on this has died down (personally, regardless of how regressive it would be, I can’t conceive of them raising this up to 20% in one step – it would be both inflationary and really hit the high street). There are heavy rumours tonight of an early start to the plan to raise personal allowance, but will this be targeted at people on low incomes or result in tax cuts for the wealthy as well? Clearly the test here is: will the tax plans take more from the wealthy than the poor overall?
  • Will it be egalitarian? The government is committed by statute to assess all its policies on the basis of socio-economic inequality. The Lib Dems supported this in the last parliament (the Equality Act 2010), but thus far the coalition has been entirely silent about how it intends to make this a reality. Instead, the emphasis has been on social mobility, social opportunity and poverty. Despite this, the question is, will the budget contain within it a clear set of policy tools to ensure that such talk carries weight, or will we just get the rhetoric? Indeed, rhetoric aside, in terms of practical measures thus far, the coalition seems to have been going out of its way to scrap youth employment schemes. How do we ensure that all this doesn’t lead to another generation left on the scrapheap (the bill for which future generations will end up paying)?
  • Will we end up with more or less means testing? Child benefit is frequently cited by journalists as a benefit likely to face the act in this budget, albeit in the form of means testing rather than abolition. Yet increasing means testing is a highly problematic measure. Fundamentally, it increases the marginal rate of tax (i.e. for every extra pound earned, the proportion that is clawed back in taxes and a loss in benefits), something which both the Lib Dems and Tories were at pains to criticise in opposition. They must also be applied for, meaning that more people will end up not claiming for the benefits they are entitled to. Reducing the taper for benefits that are already means tested, such as the Child Tax Credit, is less problematic but they are relatively inexpensive already and thus won’t save an awful lot of money. But increasing the scope of means testing will be counter-productive in the long run.
  • Will this budget lead to a fairer, greener economy? The Lib Dem plan was not just about economic recovery; it was about ensuring that the new economy was significantly different to the old one. Our vision was all about investing in green technology, reduced dependence on the financial sector and increasing social mobility. During the run up to budget day, it has been notable how lacking government statements have been in vision. Nick Clegg’s email this evening was pitching somewhere between Thatcher’s “there is no alternative” and Churchill’s “I have nothing to offer but blood, toil, tears and sweat.” The much promised pain would at least be worth it if, at the end of all this, we had something tangibly different to look forward to.
  • What will be in the budget to prevent a “double dip” recession? It is hard to see how taking the amount of money out of the economy that is being proposed can be done without plunging the UK’s fragile economy back into recession. This would be disastrous. It would add to the national benefits bill and reduce the tax intake and thus make reducing the deficit more difficult, not less. So the final crucial question will be: what will George Osborne announce which will ensure that does not happen?

Those are my benchmarks – what do you think of them? And should we be considering anything else when evaluating the budget tomorrow?

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6 comments on “How should we evaluate the budget?
  1. Matthew Doye says:

    Accepting there is going to be some degree of fiscal retrenchment, I hope that it will be balanced by reinvestment.

    We should watch closely for measures that may prove inflationary given the upward trend in both inflation and interest rates. Particular dangers here are increases in VAT and tax cuts elsewhere; I worry about a return to higher levels of inflation before the economy properly recovers.

    Will there be anything on local government? Local spending can deliver better value and respond to local conditions in a way that central government cannot, so hopefully talk of loosening controls on local authorities will be put into action.

    My main criteria for judging fairness will be the impact on those relying on state benefits. That the net effect on them is is not negative is an obvious measure, but that there should also be no more slippage compared to the rest of the population is more subtle yet equally important. We should not tolerate a state sponsored increase in income inequality.

  2. Terry Gilbert says:

    The 20% VAT rise is both inflationary and ethically disgraceful. The poorest fifth of the population pay about 12% of disposable income in VAT while the richest fifth pay about 4%. This is a highly regressive way to repay the deficit. Either the millionaires at the top of our party have very little influence, or they just don’t care about the ‘fairness’ agenda.

  3. Mark Yeates says:

    20% VAT is very hard to swallow. Dressed up with some give but a lot of take. Public Sector Workers pay freeze, many I know in the civil service earn just over the 20K mark and with rising costs etc will be worse off, and their pay has been frozen for sometime under Labour too. Still wading my way through the document though – looking for some orange .

  4. Mark Yeates says:

    One positive – although not in the money in ones pocket sense, is the change from GDP to GDP per capita as a means to well being – and how they can incorporate the Stiglitz, Sen and Fitoussi report. the two figures are strongly correlated but show a marked lowering of output. And an increased disparity between GDP and GDP Per Capita since 2004; with a major dip in both since 2008.

    Box 1.2 pg 10 of Budget Report.

  5. Mark Yeates says:

    All the above aside however; I am determined to remain in the party. I am even considering proposing myself for my local party executive. If we are so concerned and want our views heard and understood we need to say it loudly and coherently.

  6. Terry Gilbert says:

    @Mark 8.04pm – Thanks for staying. Do please consider being a Conference Rep too, if you aren’t already. Conference is expensive, but we are the only half way democratic party in the country with a significant representation in Parliament.

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