Wednesday, March 21, 2007

The FT on the Budget: Lex and Martin Wolf

Martin Wolf is always good value and if you want a detailed account of what the new budget means this article is well worth reading in full. This section seems particularly crucial:

"Overall, as was always expected, the Budget is close to neutral. How, then, has the chancellor been able to finance his two most exciting announcements: the reduction in the rate of corporation tax from 30 to 28 per cent, at a cost of £2.23bn from an indexed base in 2009-10, and the reduction in the base rate from 22p to 20p, at a cost of £9.64bn? The answers are simple: the former is financed by cutting capital allowances, worth £2.27bn in 2009-10; and the latter is largely financed by the elimination of the 10p starting rate of income tax, worth an additional £8.63bn in 2009-10."

An opinion that I've heard a lot from right-wing enthusiasts for this budget is that it is a lot like what we've been expecting from George Osborne, Lex argues the same although he cautions that even more strain is being put on the public finances.

This is clearly true to a certain extent. The change to the main rate of corporate tax, financed by cuts in capital allowances is a moderate version of exactly what the Shadow Chancellor proposed just a few days ago. However, there are two crucial differences:

  1. The reliance on the tax credit system to compensate poor families for the loss of the 10% rate. Given the weight of Tory criticism on their effectiveness it seems more likely that some kind of change to personal allowances would have been made. Relying on tax credits is problematic as they are neither simple (and once they are relied upon the benefits of simplification start to be lost) nor comprehensive (in particular the single poor will suffer).
  2. An anomalous hit to small businesses. This is hugely problematic particularly as the only compensation to them is an expansion in capital allowance which means the organisations least able to cope with increasing volumes of red tape will have an increase in complexity rather than simplification.

These two big differences are the most concrete departures from Tory policy. There is some suggestion in the response the Conservatives have released today that they are aware of this. By contrast, the rest of the Conservative official response is largely boilerplate: "we care about the NHS" and "borrowing is too high" without policy to address either.

It seems plausible that this budget might encourage the 'sharing the proceeds of growth' rhetoric from the Conservative Party to become adventurous. Instead of only talking about revenue neutral changes like the ones this budget is mostly composed of they now have cover, as this budget somewhat accepts the 'sharing the proceeds' logic, to start talking about what they might do if plausible growth gives them the opportunity to do some sharing. In the end this Budget was still a net tax raising budget, by hundreds of millions according to the Business, and the Conservatives could articulate that sharing the proceeds of growth will allow them to change this pattern.

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