Well, I’ve just watched George Osborne come of age. The ‘light-weight’, ‘inexperienced’, ‘young’ Chancellor gave an assured performance that will do wonders for his poor reputation. It should also dispel some of the prejudice that still exists about the modern Conservative Party.
The spin that had been dripping out from Whitehall over the last few weeks could be summarised in one sentence: “This is going to Hurt”. The facts about the economic situation were not in question –
- For every three pounds we currently receive in tax receipts we are spending four on public services (i.e we have a significant structural deficit).
- The National Debt is already £22,400 per head.
The nation could not go on spending like drunken sailors on shore-leave. You cannot tackle the debt until you tackle the structural deficit. You can only tackle the structural deficit in one of two ways – raise taxes or cut public spending. The trouble for George Osborne is that neither is a popular thing for a Government to do. But in some ways the choice was made for him, as he put it, “We are over-spending – We are not under-taxed”. So with an impossible juggling trick demanded what is my gut reaction to what he has done today?
Well he had some pleasant surprises that may confuse those who cannot see the Tories as anything other than the ‘nasty party’:
- The increase in the tax-fee allowance was inspired and will benefit those on the lowest pay. I fully acknowledge that this was a Lib Dem policy but it is a credit to our Coalition that we really have cherry picked the best thinking from both Parties. 880,000 of the poorest working people taken out of tax. Wonderful.
- The raise in Capital Gains Tax will mean that the wealthiest in our society cannot be accused of not shouldering their share of the burden. Those who thought the Tories were all about protecting the rich ahead of helping the economy have been proved wrong.
- His surrender of forecasting powers to the Office for Budget Responsibility is absolutely the right thing to do for the country – but removes a key ability for him to ‘play politics’. The best thing Brown ever did as Chancellor was give up the power to play politics with interest rates – Osborne takes this to the logical next step.
- The acknowledgement that the banks brought about the financial crisis and the new measures to tax riskier aspects of their behaviour will be in tune with popular feeling and was the right thing to do.
- Restoring the link between state pensions and earnings.
- As a small-business owner I was delighted with the measures he put in place to give us a fighting chance of getting through the recession.
- No cuts in capital expenditure. A grown up lesson learned from the last time the Conservatives were in power in the early 1990s.
The headline will of course be about the rise in VAT. For all the above the pain had to come and this is where the punch landed. A tax on consumption does encourage individual prudence, but it also risks lowering consumer spending to the point that both retail and manufacturing are hurt. The leap of faith (no doubt supported by economic modelling) must be that the proportional pain caused by the 2.5% rise is counterbalanced by the good to the economy from the reduction in structural deficit. We need to monitor this closely and make sure the economic modelling is correct – if it backfires we shouldn’t shy away from course-correcting quickly.
Obviously, much of the pain is also going to be felt by the Civil Service when the departmental cuts have to be worked through and Councils as they struggle to work within the constraints brought about by a council tax freeze. The challenge for both Civil Service and Councils will be to deliver those reductions with the same equity and tone that the Chancellor managed today – and crucially without hitting the public perception of service delivery. Ultimately, for right or wrong, it will be that upon which the Coalition is judged.