Budget 2009 – The BAD IDEA Analysis

Alastair Darling has delivered his Budget, and it’s quite the gamble – the government is set to borrow a staggering £606bn over the next four years, taking public debt to nearly 80% of national income. He asserted, in an attempt to win much-needed political points off the Tories, that “You can’t cut your way out of a recession”, promising a range of public spending initiatives to drag the UK into growth once more. 

Darling is offsetting the bad news of this debt (which Cameron rightly lambasted him for rushing through) with an optimistic forecast of how the country is going to grow out of the recession. He sees 1.25% growth in GDP for 2010, much earlier than the IMF and guys like Roubini and Krugman place the end of the recession. After the 3.5% contraction he forecasts this year, that’s a pretty big and quick swing back to growth; he cites, as he did earlier in the week, “underlying strength” in the economy as effecting it.

He mentions creative industries, manufacturing and green tech as all being areas whose growth will ensure Britain’s march to financial stability – more signs that Labour believes a “green New Deal” is the answer to our woes, as it was to Obama. Darling also dubbed this the “first ever carbon budget” – £100m for energy efficient housing, a 34% cut in carbon emissions by 2020, £435m for energy efficient buildings, £525m investment in wind farms, a total of £1bn against climate change. Insulated amongst these announcements were rather less green moves, like taking power plants that store the heat they generate off climate change levies, and further North Sea fossil fuel prospecting.

Alcohol and tobacco taxes both increased by 2% – note that Cameron attacked the former of these as he couldn’t get away with the latter – as well as fuel going up, all of which is pretty sound, creating £6bn by 2012. Also encouraging were the tax breaks to support business investment – surely the taxation from job creation will outweigh these breaks.

More headline-grabbing is the increase in the top income tax band to 50%, though as it affects 1% of taxpayers, it’s likely to create more political debate than it is tax revenue. And while it’s morally defensible, there is a danger that the 50% rate, a psychologically significant amount, will prompt an exodus of talent from the City. 

What’s really worrying though, as well as the nagging feeling that the £606bn figure will get increased at some point, are the vagaries of this budget announcement. Darling announced £9bn by 2014 from “efficiency savings”, a maddeningly subjective term. And rather like the G20 summit, there are announcements recycled from old news – asset-backed securities, Lord Carter’s Digital Britain report, Lord Turner’s regulatory reforms. There’s announcements that jar with existing promises – the £400m for 16-18s to stay on in educations not really dovetailing with the recent £60m cuts for sixth form colleges. Then there’s the time given to pure vote-winning measures – £50m for renovating armed forces accommodation - and the krazy schemes – a £2000 discount on a new car when you trade in your old one, with nothing to tie it to directly generating sales from British industry (or, presumably, stopping you from buying a second-hand car for less than £2000 and exchanging it for a profit).

As for the political implications of the Budget, they’re massive, and Cameron’s performance after it was delivered was pretty laser-guided (aside from a sloppily-delivered closing remark). His oratory and ridicule will certainly win him votes, but they come a time when the international market needs to be convinced of Britain’s security and profitability, and so they could prove damaging to us all.

We’re taking on debt by selling on gilts – a nebulous commodity like shares or bonds – to foreign countries, and spending the money we get from them on the Budget promises. The foreign countries need to think they’ll see a decent return on these gilts, and if they perceive a country to be in dire financial straits, they’ll stay away – we saw recently the frantic soothing of China by the United States when the quality of the US as an investment was questioned. If Cameron smears Darling’s name too hard, the debt will go unsold, Darling’s plans won’t come to fruition, and the country will suffer. It’s a fine line to walk on – political gain versus state security.

This is a budget that trades on optimism. Optimism will generate the foreign investment in our debt in the short term, and Darling hopes that it will generate consumer spending too (he’s preserved the VAT cut for the rest of the year to help). And beyond that, he’s optimistic that house-building, green technology, young people being prompted into work, and ongoing business investment, will all add up to a thriving Britain that will have bounced back in record time, and will easily be able to pay back its debt. We really, really want to believe that.

Posted by Ben Beaumont-Thomas in Hot Money | April 22, 2009 3:18PM |