UK Budget 2012 - the analysis

The UK budget was announced today.

The OBR also published its economic growth forecasts in which it revised the UK growth upwards, to 0.8% this year, and 2% the next. Available here.

The initial reactions were mixed. Some policies are welcomed, some are long overdue, some are still not good enough, and some are bad. I've split them into three categories: the good ones, the bad ones and the 'limbo' - or those in between. The evaluation of the policies is based on the previous blog post on budget expectations, and whether they have meet the expectations. 

Good

Corporate taxes to go down even faster - to 24% immediately, and to 22% in 2014. A good policy that will benefit the British business. There is strong reason to believe it can be deemed credible. It would be better to reduce it even further all the way down to 20%, but this is a start. At least the business expectations on corporate taxes can be adjusted in the right direction. 

Transparency - Tax statement to be released so that people will be able to see on what their funds are being spent directly. This is a welcomed move as it will keep budgetary spending under more scrutiny. Maybe the people will finally realize on what sort of nonsense the government is spending their money on and do something about it. 

Planning - a call to reduce the complexity of planning is more than welcomed. This is another pro-business policy I called for the other day. They've announced it as a significant effort to reduce the red tape (from more than a 1000 pages of regulation down to 50), and will be welcomed by businesses. 

Limbo

50p top income tax rate down to 45p. A move in the right direction but should have been more bolder. This way they have made a concession which will still be attacked politically, but haven't made the full economic benefit from it. If they continue on working to cut it down to 40p before the next election that would be encouraging. 

Personal allowance to rise by £1,100 from next year (to £9,205), making 24 million people better off (£220 a year). Even though this was the biggest personal allowance increase ever, it should have gone up to £10,000 this year, with an announcement to rise even further in the years to come. However, I understand why this was unfeasible: the deficit is still too high (5.6% of GDP next year) and every £100 increase of personal allowance means 500m less for the Treasury in revenues.

Tax system in general - a call for simplification is positive (like the removing of the loopholes in the VAT, or the pledge to merge the income tax and national insurance) but more needs to be done to address all of its complexities. The call for transparency is an example of a positive move in that direction. Keep up with that. 

Sunday trading rules suspension only during the Olympics, which is good, but not enough. They should have been made permanent.  

Infrastructure - the privatization of roads is still a suggestion, without any real policy aimed at that direction. Other infrastructural projects are still an example of too much government guidance in the economy (picking winners in the gaming/entertainment industry, funding ultra-fast broadband and building airports). Stick with the private sector solutions.

Bad

Business rates scheduled to rise in April - nothing was done to recall this. Too bad since it will increase the costs to businesses. This policy could have been the best confidence booster for businesses.

Credit easing loan guarantee scheme - it won't lower the costs of borrowing to the smallest firms who need it the most. A much wiser policy to help the businesses would have been the stopping of the business rate rise. 

The youth contract - I understand the young are suffering, but it will be much healthier for them and for the economy in general to help the businesses earn and keep more money (via sticking to deregulation and reduction of direct and indirect business costs) instead of giving them money to hire someone. This furthers the dependency mentality and is not good for the business or for the youth. If you really want to encourage more youth hiring, remove the employer's NIC, abolish the minimum wage and encourage temporary, zero-hour and fixed term contracts through business tax incentives. There is a crucial difference between a subsidy and a tax incentive - one encourages you do work more, the other to work less. 

Bank tax to increase to 0.105%, meaning that the banks won't benefit from the corporate tax rate decrease. Not a smart policy to increase bank lending. In addition, the credit easing loan scheme will imply additional costs to banks that engage in it.

Gambling, alcohol and tobaco - a huge increase of tobaco levy will raise ciggarette prices by 37p. Foolish as it will disproportionally burden the poor and middle income groups. Besides, there's not so much revenue coming from these duties. 

Stamp duty for houses over 2m to rise by 7%. So a mansion tax after all. More politically motivated than economically. I'm interested to see how much extra revenue this will raise.

Conclusion: My budget expectations weren't quite met. There's still a lot of political concessions made that will end up hurting the economy. It was aiming to be a pro-growth budget, but more likely a slower pro-growth budget than expected and needed. 
In microeconomic terminology, it is Pareto efficient regarding the current policies, but one can hardly say it was a Pareto improvement.

Comments

  1. nice micro analogy at the end there

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  2. I can't say I agree with you on the credit easing scheme. Its main goal is to lower the interest rates on business loans in order to enable them an easier access to finance. The government isn't spending anything on it, there is basically no risk since the banks will still undergo detailed scrutiny of every company that is to receive a loan, but will at the same time feel safer to lend as the government is partially backing up the whole deal. I'm not saying it's impossible for the government to lose money on this, but it certainly won't happen in the short run. This is why I think it's a good type of a short run demand shock that will help businesses get more credit, without the government having to spend any money on it..

    But yes, I agree that the business rates shouldn't go up, at least not for the small businesses. Then again, you have to be able to finance all the other given measures such as the corporate tax rate decrease and the personal allowance increase (both very likely to increase consumer and business confidence)

    ReplyDelete
    Replies
    1. The problem with credit easing, even without the need to refinance loans directly, is that it artificially increases aggregate demand in the medium run, creating essentially the same problem that caused the current crisis.
      It is a policy that will result in further distortions of signals on the bank loan market, as the government wants to control the prices of loans (the interest rate). The distortion effects are similar to those of a fiscal stimulus (as is the entire credit easing idea). So that is why I firmly stand against it.

      The business rate that you mentioned is a good example of a trade-off taken by the government – either finance consumption by raising the personal allowance, or finance business confidence by keeping the business rates down. They tend to think they've helped both with the personal allowance increase on one side, and the credit easing scheme and the corporate tax decrease on the other. But in the end, both policy choices were done half way which will produce partial results. Just like the 45p instead of 40p income tax rate. That is the real problem.

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    2. But that was my point - it doesn't have to artificially increase aggregate demand as long as the policy is aimed at a short term 'support' for the SMEs. It is unlikely this will help them all, and it is uncertain how large in scope the support could be, but it is undoubtedly a good way of thinking about how to raise confidence. At least temporarily, as this will encourage the businesses to take on more risks. The government will literally spend no money on this, which is why I called it a zero-risk policy.

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    3. When a government sends signals of credit creation and starts setting loan prices, than such a policy cannot be called zero-risk. Not in the short-run and especially not in the long-run.

      On the other argument that this would encourage business confidence, the question is again - which businesses? Will it address the problems of small and micro businesses, or bigger well established ones? It is precisely the SMEs who need money the most, and they won't get anything out of the loan guarantee scheme as they are still considered too risky by banks and are required to go under detailed scrutiny to receive credit. The single best way to help the SMEs is to decrease their direct costs by scraping the announced increases in business rates. Credit easing schemes don't help those who need help most, send distorted signals into the market and have a high probability of increasing future systemic risk.

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