UK budget: don’t mistake luck for skill

Ever since the Conservatives came to power in 2010, austerity has dominated the UK budget. It was a policy introduced to reduce the yawning budget deficit, which made the country vulnerable to attacks from the bond vigilantes.

But it has also brought misery to millions of poorer people, it led to an explosion of food banks and informal aid networks as essential public services have been cut, and caused an increase in social inequality that has prompted those on the left of the political spectrum to complain that Britain was going back to Victorian times.

The budget that will be presented on Wednesday, March 18, could well be the last one that George Osborne gets to put forward. Will it be radically different, marking the end of austerity just in time for the May 7 general elections?

There have already been a series of electoral handouts from the Tories. Worried that a whole class of people will be stuck with renting – as their policies have disproportionately helped landlords at the expense of first-time buyers – politicians in the Conservative party have promised more subsidies for those buying homes, such as aid for first-time buyers under the age of 40.

The subsidy works like this: first-time buyers under the age of 40 will get a 20% discount on newly-built homes, which the government will cover by waiving local authority fees for homebuilders.

This comes on top of other already-existing subsidies such as Help to Buy, which together with speculation on London property prices, have inflated a housing bubble to dangerous proportions.

Having attracted the young with the promise of cheaper housing (even though few of them will be rich enough to actually be able to afford buying the subsidised properties), the Conservatives have given an electoral gift to the elderly too: pensioner bonds.

Over 65s can now buy government bonds with interest rates between 2.8% and 4%, much higher than the Bank of England’s record low 0.5% and offering returns above inflation, after five years of negative returns, eroding purchasing power and general malaise due to various social services cuts.

Although his austerity policies have not really helped to put an end to the crisis, Osborne is part of an extremely lucky government: the fall in oil prices and low inflation at a global level are easing the fiscal burden just in time for the polls.

Simon Wells, chief UK analyst at HSBC, has calculated that the impact of positive factors — such as lower oil prices, lower unemployment benefits as more people find jobs, higher VAT payments as low inflation boosts purchasing power — could mean that public sector net borrowing in 2015/2016 would be £2.5 billion lower than initial forecasts, at £73.4 billion.

In Wednesday’s budget, the government will want to seem generous but at the same time not give up on measures to rein in the budget deficit completely. The gap did shrink since it exceeded 10% of GDP in 2010, but it is still wide, at 5% of GDP, compared with around 3% in many other EU countries.

Roger Bootle and Jonathan Loynes from Capital Economics believe austerity is suspended until the election.

They noted in research released before the budget that the last six pre-election budgets “have seen Chancellors announce average net tax giveaways of £3 billion per annum.”

UK budget and elections

UK budget before various elections. Source: Capital Economics

Osborne can afford a giveaway of between £3 billion and £4 billion without raising public borrowing, so he could scale back spending cuts before the election, Bootle and Loynes wrote.

UK Budget Still Austere

There are still £100 billion of spending cuts planned, so the meagre few billion would not make a huge difference, but for the party’s image it would certainly be a good idea to look more generous.

Osborne could say he would devote more money to the army in order to keep to the NATO target of spending 2% of GDP on defence, or, given that Labour focuses on the NHS in its campaign, could pledge further spending on health, the two analysts said.

Raising the income tax allowance – the level under which no tax is paid in the UK – would be a popular measure, which would benefit most of the voters, but especially the poorest.

It is already set to increase to £10,600 in April this year from £10,000, but Osborne could raise it even further, to £10,800 or even £11,000.

For the pensioners, besides the pensioner bonds and the bigger freedom on drawing out their entire pension – although not always a good idea – the new UK budget could bring freedom from existing annuities too, by allowing them to sell them in exchange for lump sums.

This would probably kill or greatly reduce the annuity business, as well as increase the risk that the state would need to pick up the bill for elderly people who suddenly run out of money sometime in the future.

But just as with the housing bubble, which the government has sought to keep inflating at almost any cost, the government is kicking the can down the road with pensions too, eager to get as many votes as it can.

Ever since coming to power in 2010, the Conservatives have been extremely lucky: the eurozone debt crisis deflected attention from the UK’s own problems, while the price of oil obligingly came down to give struggling households more breathing room just in time for the election.

If the government does go ahead with more electoral giveaways in the UK budget to be presented on Wednesday, it would be guilty of mistaking luck for skill. This is always a dangerous mistake to make: the payback could come after the election.

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