Tax receipts for January hit a record high of Â£61 billion, bringing the projected deficit down to Â£117 billion as opposed to Â£127 billion. Instead of using this extra Â£10 billion to reduce the deficit, it is very likely that the Chancellor will want to sprinkle some of this borrowed money into the economy. Senior figures in the coalition are openly debating how to extract more money off the taxpayer and to promote growth (i.e, more spending). Rumours are spreading like wildfire about mansion taxes, cutting the 50p rate, cutting child benefits and generally punishing anybody that makes a few bob. There’s a lot of confusion going around as to what’s on offer and at stake, so let’s try to add some clarity.
What we do know is that the four-man government of David Cameron, Nick Clegg, Danny Alexander and George Osborne met on Monday to finalise all the details before they head off to pay homage to President Obama. Seeming as the treasury has had enough of the anti-business nonsense from Vince Cable, they’re very unlikely to take on board anything he has suggested – and thank goodness too.
The Office for National Statistics (ONS) has confirmed that the public finances are marginally better than most had predicted, paying off Â£7.8 billion of the nation’s debt in January – an improvement on the Â£6.3bn predicted and Â£5.2bn for last year. This is due to said record high tax receipts, which bring the national debt under the Â£1trillion mark (it’s actually nearer Â£7Trn when you take into account government liabilities). But don’t fear, they’ve almost certainly passed the trillion mark by the time you read this – as the ONS will confirm soon enough.
The Office for Budget Responsibility had forecast that the Government would have had to borrow Â£127bn for the financial year running to April. However, after the “good news” that the government is grabbing even more cash than expected, they’ll only have to borrow Â£117bn, apparently giving the Chancellor Â£10bn to kindly spend on our behalf. There are a few popular ideas floating around at the moment so we’ll take a look at what those are:
1. Reverse the child benefit changes costing Â£2.5Bn from 2013. Back in October of 2010, the Chancellor planned to halt child benefit payments to all higher rate taxpayers, potentially upsetting a lot of Conservative grass root supporters. It turned out that a family with a single earner of Â£44,000 or more would not get the benefit whereas a household with two parents earning Â£43,000 would still receive the benefit. Personally, I would rather see child benefit scrapped entirely and the money saved used to fund more income tax cuts. Expect to see a dampening of the policy rather than a full U-turn.
2. Cancel the planned 3p fuel duty rise – would cost Â£1.5Bn annually. Considering the UKs fuel duty is the highest in Europe (The average Briton pays Â£1000 in fuel taxes alone) and the Chancellor whacked up North Sea oil taxes from 20% to 32%, this seems like a no-brainer. Many organisations, including the AA, are begging the government to at the very least delay the rise as many small businesses are seriously struggling with increased costs. Many economists are predicting the price of oil to start falling due to a weak global recovery so the Chancellor might go ahead with the increase.
3. Freezing business rates at a cost of Â£1.8Bn, they’re set to rise by 5.6% in line with Retail Prices Index for September of 2011. This increase would start to devour company’s cash flows, reduce confidence and more unemployment. Why bother lowering the corporate rate when they’re just going to raise another business tax? I’m predicting that the Chancellor will go ahead with the rise on the basis that corporate balance sheets are recovering and helping consumers is his priority.
4. Raising the Personal Income tax allowance to Â£10,000 will cost an Â£11Bn annually. This is at the centre of the coalition agreement (which, by the way, they’re already trying to renegotiate – end of the coalition in sight perhaps?) to lift around 3.5 million people out of income tax. The Lib Dems and many Conservatives are calling for the government to reach the Â£10,000 mark sooner than 2015 given the ever rising cost of living. The cost of going straight to Â£10,000 this budget would be surprising, given the cost of doing so. But the Chancellor might raise the threshold higher than the Â£8,015 planned to keep the Lib Dems content for the time being.
Aside from these, we can without a doubt expect more joyful Keynesian supply-side reforms. i.e, spend a ton and hope that in 10 years it might have an effect, by which time the politicians will conveniently be out of office. What annoys me most is that all of the above examples I’ve shown where the Chancellor might help us out a bit assumes this: Well, we were going to borrow Â£127Bn, so let’s borrow that amount any way. In other words, the tax cuts, freezes, delays etc will all be financed through debt. Has it ever occurred to Osborne that he could cut taxes and cut spending to match it whilst at the same time winning votes? I always thought winning votes meant everything to a politician, especially for Osborne who spends the majority of his week as a campaign strategist. I would happily bet that anyone reading this could find many billions that could be instantly cut out of the budget that would do the world of good. As this article here shows, the Â£11Bn we spend on foreign aid is largely wasted and would conveniently cover the Â£11Bn required to raise the personal income tax allowance to Â£10,000. The Conservatives might even get my vote if they did that!
It has been proven many times over that Keynesian economics just doesn’t work. The government mismanages the economy through manipulation of currency, taxes, centralised spending on pet social projects and money supply techniques (Quantitative Easing anyone?). Sadly, nothing is harder for men than to face facts that threaten strongly held beliefs or those whose salary depends on avoiding the truth. Think about it, the two underlying principles of Keynesian theory is 1.) Saving is bad and; 2.) Capital is better in the hands of the few (government) than the profit motive of the many. Firstly, we’ve all heard the saying “save for a rainy day” and whilst we may find that hard at times we know it to be a good thing. Secondly, look at human nature. Is Keynesian theory really saying that the government is the best appropriator of the millions, billions and trillions of the money we give?