History won't judge this budget kindly

by Ed Bowsher on 22 June 2010  |  14 comments
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George Osborne's budget includes some good measures but the spending cuts will do more harm than good.

When George Osborne met some former Tory Chancellors recently he was apparently told that press comment on the day after a budget usually differs from the longer-term historical verdict. So if journalists like a budget on the day, the historians will be more critical and vice versa.

My hunch is that the Chancellor will probably get lots of positive write-ups in tomorrow’s papers but history will judge this budget far less kindly.

In fairness, Osborne did get some things right today.

For starters, I like the increase in Capital Gains Tax (CGT). Some rich folk have been able to reduce their tax bill by classifying some of their income as a capital gain and hence ended up paying 18% CGT as opposed to 50% income tax. Osborne has increased the CGT rate to 28% for higher rate taxpayers which will make this tax dodge less attractive. As a result, income tax revenue should be boosted.

I also like the new Bank levy. It follows Barack Obama’s lead by including an incentive for the banks to raise cash from ordinary savers rather than the financial markets. That’s a smart move as the banks’ dependence on higher risk capital was one of the primary causes of the financial crisis. (Perhaps even the primary cause.)

What’s more, Osborne is right to focus on the deficit. An annual deficit greater than 10% of GDP can’t be sustained for long.

However, Osborne’s big mistake is to think that spending cuts in 2011 is the solution to this problem. I’ve written about this issue twice before, but I think my point is worth repeating. Our current recovery is very fragile and the cuts announced today could easily send us back into recession. And if that happens, tax revenue will fall and the deficit won’t contract anything like as quickly as Osborne expects.

This has happened before. The classic example is Franklin Roosevelt’s economic tightening in 1937. Roosevelt took over as US President in 1933 when the depression was still in full swing. He then presided over a gradual recovery in the years leading up to 1937. At that stage he thought it was time to focus on cutting the deficit and introduced government spending cuts.

Those cuts damaged the US economy and reduced tax revenue - making it harder for the US to reduce the deficit.

To his credit, Osborne isn’t inflicting pain purely on the weakest member of society. Measures such as the CGT hike are designed to make sure that the rich pay their share. That’s welcome. But the sad truth is that if we go back into recession, the poorest will be least able to cope.

More:  The Budget: Winners and losers