By Graham Turner
Downloading PDF. Please wait... Issue 349

Axe finally falls in Tory budget

This article is over 12 years, 1 months old
"The Tories can reduce the deficit without a rise in VAT," boasted George Osborne to the Daily Telegraph on 6 April. "The plans we set out involved around 80 percent of the work coming from spending restraint... The tax increases are already in place and the plans do not include an increase in VAT."
Issue 349

Honesty was clearly not a prerequisite to securing the keys to 11 Downing Street. But then history is merely repeating itself. In 1979 the then Tory chancellor Geoffrey Howe declared, “We have absolutely no intention of doubling VAT.” Strictly speaking, Howe did not lie. VAT did not quite double, as it went up from 8 percent to 15 percent.

Osborne, ably abetted by the discredited David Laws, claimed the public sector finances were in worse shape than the previous government had admitted. That will undoubtedly be the justification for this regressive U-turn. Again this is misleading, to say the least. When the Treasury published April’s monthly borrowing numbers, it admitted data revisions had cut borrowing by £7.5 billion. The Treasury announced a similar “surprise” for May, with revised data causing borrowing to fall by a further £3.2 billion over the year to April. May showed a further drop in borrowing, of £1.4 billion.

The economy has been growing, tax revenues are rising, spending is not out of control and the deficit is coming down faster than the former Labour government forecast. It is quite conceivable that the planned deficit reduction to £140 billion for 2011/12 could have been met a year ahead of schedule.

That could have been rather inconvenient for a Tory chancellor desperate to redraw the boundary between private and public sector provision of services. A further £30 billion of cuts will be detailed in October. Deep cuts loom for non-ringfenced departments, including education. A pay freeze for around four-fifths of public sector workers will, of course, mean a cut in real incomes. The VAT increase means a decline in real standards of living for private sector workers too.

According to the Office for National Statistics, real take home pay across private and public sectors combined was down by 2.5 percent on an annual basis in the first quarter of this year – the biggest fall since the credit crunch began. This decline looks set to extend into a fourth year, unprecedented in the post-war era.

The decision to uprate benefits in line with the consumer price index, which excludes housing costs, rather than the retail price index, will bring significant savings for the government, but will also heighten inequality. The increase in the income tax threshold will have little or no impact on poorer pensioners, the unemployed and parents in low-paid part-time work. But these vulnerable groups will be clobbered by the VAT hike. However, the burden on businesses is eased, with staged cuts in corporation tax rates from 28 percent to 24 percent.

With bond markets still unconvinced that Greece and other Euroland countries have done enough to bring their deficits under control, Osborne will continue to preach austerity. Worryingly, there are signs that the US economy is starting to turn down, alongside a raft of European countries that have been hit hard by the sovereign debt crisis. Renewed problems in the global economy may give Osborne the cover to launch even deeper cuts in public spending than those outlined in the emergency budget.

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