Is Osborne tanking the UK’s credit rating?

An excellent blog post by Duncan Weldon at False Economy argues powerfully that the real news yesterday was not the measures announced in George Osborne’s budget, but the economic numbers that accompanied it.

Despite Osborne hailing ‘a Budget for Growth’, OBR growth forecasts were revised down for last year, this year and next year.

Unemployment was revised up and is now expected reach over 8% this year. Alongside this inflation was revised up and average earning growth down. In other words prices will rise faster than expected, and wages slower – meaning the squeeze in living standards is set to intensify in 2011 and 2012.

The downward revisions to UK economic growth came despite the OBR revising world economic growth upwards – Osborne’s spending plans will continue to crimp UK economic performance.

The impact of all this on the deficit was predictable. It was revised upwards, with the government now expected to borrow an additional £45bn over the coming years.

Osborne’s ‘growth package’ – a further cut in corporation tax, some relaxation of planning laws and the creation of 20 1980s-style ‘enterprise zones’ – is unlikely to have a major impact. The OBR concluded that the effects of these measures would be ‘minimal’ and ‘unlikely’ to raise the trend growth rate of the UK economy. Despite this they were widely praised by many in the business community – but then who doesn’t like a tax cut?

But more extraordinary was his reference to a story from Reuters that credit ratings agency Moody’s had raised the possibility that the UK’s sovereign debt rating could be downgraded from its present AAA if slower growth and a consequent failure to reduce the deficit allowed the position in the UK to worsen.

It suggests that there are at least parts of the world financial community who see the UK at risk of falling into an Ireland or Portugal-like spiral of decline – directly as a result of Osborne’s economic policy and his apparent lack of grip.

It’s ironic when you reflect on Nick Clegg’s claim in his recent Liberal Democrat conference speech that the Coalition’s economic shock doctrine had ensured that control remained with the Government:

By cutting the deficit decisively we have restored confidence in Britain.

Essential – because without confidence there can be no growth.

We have helped keep interest rates lower for longer, helping families, helping businesses.

It has meant making difficult choices.

But at least they have been our choices…

Not forced on us by the bond markets as they have been in Greece and Ireland.

But the Moody’s announcement raises the prospect that the Coalition’s economic policies are producing precisely the conditions and uncertainties that Clegg claims to have avoided.

The steady unravelling of Osborneomics

What’s the big headline message from the Budget? It’s that George Osborne’s economic experiment is, predictably, in tatters.

The Budget announcement provided the latest in a series of bad economic numbers for the Coalition.  Inflation running at 4.5% with, apparently, no prospect of its slipping back; a second consecutive Osborne Budget in which growth forecasts have been slashed; unemployment continues to rise.  The central premise of Osborneomics – that, once freed of the burden of public debt, the private sector will generate jobs in their hundreds of thousands, more than offsetting the jobs lost in the public sector – is looking more risible by the day.

Against this background, Osborne continued to promote regressive economic measures in a budget that benefitted corporations and non-doms, and at least gave the illusion of assisting motorists (one imagines that the 1p cut in fuel duty will very quickly be offset by the price effect of the Coalition’s Big Adventure in Libya).  And, according to indefatigable tax blogger Richard Murphy,  it’s looking increasingly clear that some of the biggest winners from the Budget will be tax evaders.

And elsewhere on his blog, Murphy provides the underpinning for the central critique of Osborneomics – that even if the deficit is the problem the Coalition says it is (and I’m on the side of those who argue that its importance has been hugely exaggerated), it’s a problem of tax revenues, not of spending.  Tax revenues fell off a cliff after the banking crisis of 2008 and the problem has been exacerbated by a huge problem of unpaid tax – the Tax Gap – with the numbers suggesting it’s far bigger than the Government’s (internally inconsistent) estimates suggest.  How will the long-term erosion of Corporation Tax and the gentle treatment of Non-Doms get to grips with this, at a time when cuts at HMRC ensure that tax enforcers are working with one hand tied behind their back?

In the face of this, the only rational conclusion appears to be that this Budget was not about economics, but about ideology and politics.  The few crumbs thrown at Middle England simply cannot disguise the fact that Osborneomics has locked us into a vicious spiral of cuts, falling output and increasing borrowing.  Osborne has form for talking up Ireland as a model economy but I guess this isn’t what he meant.

And the Liberal Democrat contribution to all this?  The cynic in me would like to think it’s the £100m for fixing potholes – an appropriate measure to represent a party of pavement politicians who have so clearly failed to hack the political big time.  Nick Clegg’s message to his activists suggests … clamping down on tax evasion, and the increases in tax allowances (more than offset, of course, by the VAT increase in January) But it’s difficult to see their role as anything beyond providing the lobby fodder that makes Osborneomics possible.

So … why isn’t Caroline speaking?

Saturday’s big London demonstration against the cuts matters.  It matters more in the face of a Budget that, predictably enough, has favoured big business and non-doms at the expense of ordinary people – and following economic indicators showing that Osborne’s slash-and-burn economic policies are failing.  Yes, marches don’t change the world. The biggest demonstration in London in recent years didn’t stop Blair going to war in Iraq.  But they can and do send important messages – especially where there is more than one party of Government.

So it’s unfortunate that, by playing party politics, the TUC appears to be setting itself up to reducing the impact of that march. It appears that the only politician invited to address the rally is Labour Party leader Ed Miliband.  Whether deliberate or not, the effect of that decision is to give the impression that the march is linked to the Labour Party.

But it needs to be bigger than that.  The movement against cuts is vast and inclusive – involving public sector workers, people defending their libraries in small towns in middle England, passers-by cheering on activists closing down Vodafone stores.  Many of those people voted for parties other than Labour – not a few voted Liberal Democrat, some will even have voted Tory on the basis of Cameron’s lies about defending the NHS.

Moreover, as the student demonstrations in London late last year showed, the game is changing.  Those who said that those demonstrations meant that we were entering post-party politics were, I think, wrong; but they did show that politics, especially the politics of opposition, is being re-moulded in a way that transcends traditional party politics.  The way in which the Liberal Democrats ditched overnight almost every commitment on which they fought the elections and became eager supporters of the Tory economic shock doctrine is part of that dynamic – the fact that their betrayal hit hardest an emerging generation of new voters was a key factor.

And this is about uniting all those who reject the economics of cuts and deficit extremism, and taking the economic debate into a different and new place. It’s actually a place where the Labour leadership – which fought the last election on a manifesto drafted by Ed Miliband that proposed cuts – is not yet comfortable, and is probably lagging behind its activists.

So, why just Ed Miliband?  Why not Caroline Lucas, who has become a far more consistent critic of the deficit consensus than Labour?  Why not other political groups like UK Uncut who have transcended the party system?  It seems to me that either you have a pluralism of party political speakers, or none at all.  I freely admit I have an interest in this; I’m a Green Party member (although circumstances mean my activism is about pounding the keys on my laptop than pounding the streets), and I’m proud that Caroline Lucas is my MP.  But what seems to me crucial is that the TUC recognise the strength that comes from diversity and pluralism in a situation where the big issues do not split along easy political lines.

Combining income tax and National Insurance – simplification or ideology?

There is much speculation that in his Budget tomorrow, George Osborne will announce plans to merge income tax and National Insurance Contributions (NIC).  I have some real concerns about this.  On the one hand, to the individual in employment, it would appear that income tax and NIC could easily be merged into a single tax, making the process more transparent and possibly reducing the bureaucracy needed for collection.  But there seem to me to be problems both of principle and in practice, and I wonder whether this is about ideology, not efficiency.

As a matter of principle, income tax and NIC are raised, in theory at least, for two different purposes.  One is a general tax; the other is a contribution towards the cost of benefits, including unemployment and sickness benefit and the old age pension.  Of course, both of them go into the consolidated fund – as do excise duties like VAT and duties on petrol and alcohol.

But the point about NI is largely sympbolic.  It’s about entitlement and the right to benefits.  It allows people drawing benefits to do so in the knowledge that benefits are a right that they have earned, not a charity.  This is important when the principle of universal benefits and social provision is under unprecedented attack  – the Big Society seems to me to be an attempt to return collective social action to the voluntary sector, replacing rights with charity doled out by local committees of moral guardians.  The loss of the link to a national insurance payment seems to me to be a step away from the idea of universal provision .

Moreover, this seems to me to be a move towards the right’s dream of a single flat tax.  In many ways NIC is a highly progressive tax – there is a real risk that a combined tax could shift the burden from high to low earners, if not managed properly.

There are technical issues too.  The self-employed currently pay a low level of NI reflecting the fact that their benefits are lower – how would that be reflected in a single tax?  Many pensioners pay tax but no NI – merging the two could be a huge tax whammy for them, without special exceptions that would rather destroy the advantages of a single tax.  Currently NI contributions are paid by employers as well as employees – will those contributions be turned into a payroll tax – after all Osborne’s rhetoric in opposition about “taxes on jobs”? Or will the burden of the employer contributions be passed on to employees?  The problem with a single tax is that to make it fair – indeed to avoid it becoming a way of shifting the tax burden on to indivuduals and away from the corporate sector – it needs a set of exemptions and conditions which will mean no significant simplification.

I have a real fear that Osborne could use such a change for ideological ends – to shift the burden of taxes still further from the rich to middle-income and poor, and from business to individuals.  Many people now are unclear about the structure of the taxes they pay – this could just be the ultimate stealth tax.