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No wonder Clegg looked miserable

The Independent, March 24th 2011

There was little for the Lib Dems to cheer in the Budget

All Budgets are political, but this one had to satisfy two parties, not just one – and had to do so with no extra money. So how well did George Osborne manage to cheer the benches behind him while discomfiting the Opposition? A fiscally neutral Budget doesn’t have to mean no giveaways – the generosity just has to be clawed back by raising taxes elsewhere. And here Osborne has been politically clever. The Tories like business much more than the Liberal Democrats, but it’s easy to raise a “Boo, hiss!” from MPs of both parties for bankers and gouging oil producers. So the Chancellor managed to pre-empt criticism from Labour that the banks would benefit from lower corporation tax by raising the bank levy. And he paid for cuts in fuel duty by slapping a windfall tax on North Sea oil companies.

All MPs know how much their constituents are being squeezed on the garage forecourt. Even Labour has been calling for a cut in VAT at the pumps. So Osborne knew this would meet little opposition. The only danger was that green Liberal Democrat MPs would be disappointed. But they are outnumbered by colleagues representing rural seats in which high petrol prices cause pain – not least the Chief Secretary to the Treasury and Scottish Highlands MP, Danny Alexander.

The Liberal Democrats were given their beloved rise in the personal tax allowance, which takes another 1.1 million low-paid people out of tax while also benefiting the squeezed middle, Ed Miliband’s target group. This was the one brief moment at which the miserable-looking Nick Clegg perked up. But, while it will be sold as a Liberal Democrat win, Tory chancellors have always enjoyed raising tax allowances.

The other sources of revenue for Osborne’s giveaways are rich tax avoiders (boo, hiss from all parties) and electricity companies that burn too much carbon (ditto). The Liberal Democrats shouldn’t cheer too much, though. The new carbon price floor, which will raise more than £3bn by the end of the parliament, doesn’t just tax polluters but also boosts the nuclear industry.

Meanwhile, a stealth tax will hurt us all more and more as the years go by. This is the use of the lower CPI inflation rate for increasing tax thresholds. By the end of this parliament, it will nearly wipe out all the gains from raising personal tax allowance by more than inflation. And in future parliaments, it will continue to scoop more money out of our pay packets and into Treasury coffers.

Tory MPs were happy to hear that the 50p top tax rate may be reconsidered once HMRC has worked out whether it raises any money. Osborne calculates that sending this signal may help to discourage the wealthy from moving to Geneva. Tories also liked the cuts in corporation tax and the determination not to waver from the path of fiscal austerity. A closer look at the forecasts from the Office for Budget Responsibility, though, shows the cuts aren’t having quite the desired effect. Even since November, the OBR has had to downgrade its growth forecasts. One of the reasons, it says, is “the effects of the fiscal consolidation”.

It has also had to upgrade its borrowing forecasts. As I predicted last summer, too much fiscal tightening can have a perverse effect: growth can slow to such an extent that the deficit doesn’t narrow much and we are left with a sickly economy and a still-large burden of debt. The Government and the OBR disguise the horrors of this by insisting that the structural deficit (ie the borrowing that isn’t caused by the economy turning down) is still on track to be eliminated. But the cyclical deficit (which rises in bad times because the Treasury has to spend more on unemployment benefits and gets lower tax revenues) is forecast to be higher.

So the Government’s actions are helping to cause a bigger cyclical deficit. And some of that borrowing may even become structural: if young people who fail to find jobs now are still unemployed in five years’ time, they could become unemployable in good times as well as bad. I’m not sure that’s quite the legacy George Osborne – or the Coalition Government – had in mind.

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