UK: There’s Still No Money Left for Tax Cuts

Where is all the pre-budget speculation? In just 10 days George Osborne will deliver his fifth budget and there has been so little fuss you could be forgiven for thinking it had been cancelled. Even the Treasury seems reluctant to talk about it.

Actually, as I shall come onto, it might be no bad thing if the budget were to be cancelled but let me first set the scene. Anybody looking at Britain’s public finances is entitled to conclude that the crisis into which they were plunged six years ago is far from over.

This year, 2013-14, the Office for Budget Responsibility (OBR) predicts a budget deficit – public sector net borrowing – of £111bn. Monthly figures suggest it may come in a little below this forecast but still well above £100bn.

To put that in perspective, borrowing on this measure had never been higher than £100bn until the 2009-10 fiscal year, when it ballooned to £157bn. This year’s deficit, in other words, is the fifth biggest in cash terms on record.

We get used to big numbers, but only a few years ago a budget deficit of £60bn would have been regarded as a crisis, let alone one in three figures (and staying in three figures for five successive years).

To add another bit of perspective, the budget deficit this year is, according to the OBR, 6.8% of gross domestic product. That is only the merest touch lower than 1975-6, a borrowing level that helped trigger Britain’s 1976 rescue by the International Monetary Fund.

Public sector net debt, £1,239.6bn excluding the direct effects of support for the banking system, is two and a half times what it was before the crisis. A decade ago it was a healthy 30% of GDP. Now it is just under 75% and rising.

By the time it turns down as a percentage of GDP, in 2016-17, it will have hit 80% of GDP and more than £1.5 trillion. There is a lot of red ink still to flow.

A man from Mars looking at these numbers would be aghast that, to the extent there is budget talk around, it is about how much Osborne will be able to afford to give away in pre-election tax cuts.

I am as keen on tax cuts as anybody. The fiscal drag that means a record 4.4m people are paying the higher 40% rate of tax this year – up from 1.6m two decades ago – needs fixing.

So does the absurd anomaly in which people earning between £100,000 and £120,000 (from next month) pay a marginal rate of 60% (62% including National Insurance).

The coalition has raised the personal allowance to £10,000 and Osborne may move further, though this reform has gone beyond where it helps genuinely low paid. Better to raise the threshold at which people start to pay NI, just £111 a week, £5,772 a year, from April.

Business investment is improving but why not help it along with generous capital allowances, particularly for smaller firms? Actually we might see some of that. Why not help firms more with business rates?

Why not acknowledge we are in a low interest era by doubling the amount savers can put in tax-free cash Isas (individual savings accounts)? And why not help first-time buyers, complementing Help to Buy, by getting rid of stamp duty altogether on properties below £250,000?

There is much more, and not just on tax. Every housing gathering I attend – a few days I was at the National Housing Federation in Brighton – rightly bemoans the low level of housebuilding, and in particular social housing. The government complains about the squeeze on real wages but one easy way of easing it, given that the public sector acts as wage-setter in many areas, would be to lift the 1% cap on public sector pay.

Everybody will have their own wish list. Mine only scratches the surface. Some Tory MPs would like to see Osborne slash taxes across the board. Britain’s bishops are praying for hikm to ease up on the squeeze on welfare.

The point is that you do not need a man from Mars to tell you that most of the pre-budget wish list is pie in the sky. All you need is the man from the Institute for Fiscal Studies, its director Paul Johnson, who rightly points out that with so much fiscal adjustment still to come if the chancellor is to achieve a budget surplus, it would be inconsistent to have any kind of meaningful giveaway now.

The situation has not changed much since Liam Byrne, the outgoing Labour Treasury chief secretary, famously wrote a note for his coalition successor saying there was no money left.

Why has it taken so long to get the deficit down? Disappointing growth, until now, has been a factor. Weak productivity has raised official estimates of the strctural deficit.

Because of the constraints of coalition or for other reasons, Osborne has opted for gradualism in reducing borrowing. The short, sharp shock of, say, Sir Geoffrey Howe’s legendary 1981 budget in Margaret Thatcher’s first term, has been avoided.

To an extent this has given him the worst of both worlds – getting blamed for harsher cuts than he has delivered – and there may be more of this in the budget when he announces his 2015 cap on welfare spending in the budget.

Progress has been made. This year’s cyclically adjusted bugdet deficit is about half the 2009-10 record. In real terms about £60bn has been lopped off the deficit, with more to come.

But there is also much more the Treasury should be doing which does not involve opening the Exchequer purse-strings. We should not be hearing Nigel Wilson, Legal & General’s chief executive, bemoaning the fact that there are too few ready-to-go infrastructure projects for the insurer to invest in.

The bureaucratic delays that have prevented institutional money from filling the gap left by cuts in government infrastructure spending, including housing, are an appalling waste of opportunity. That, rather than tax wheezes for March 19, is where the chancellor should be directing his efforts.

For the budget itself, he should be busy doing nothing. It will be a long time, given the state of the public finances, before a chancellor’s spring thoughts can turn to big tax cuts.

This piece is cross-posted from with permission.