Analysis: Early predictions for Budget 2009
Faith in Treasury predictions is perilously low
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Thursday, 16, Apr 2009 12:00
Some early political predictions for Budget 2009
By Ian Dunt
This year's Budget is a curious thing. Massively overshadowed by the Pre-Budget Report and, much later, the G20 summit, analysts have only really remembered that it's happening over the last couple of days.
It's difficult to predict. On the one hand, it should by all rights be a neutral Budget. The handouts have already been given, and the government is likely to put off tax increases for as long as possible. That, by the way, will probably be 2011. Only the very brave raise taxes with a general election staring them in the face, and Labour will have to go to the polls next May at the latest.
But for many onlookers, it appears as if spending is now part of the government's DNA. Certainly any plans for another radical fiscal stimulus package were neutered by the odd, and faintly unholy, unspoken alliance of Alistair Darling, Mervyn King, George Osborne and Angela Merkel – much against Gordon Brown's wishes. But most people think there probably will be spending of a sort. The early news is that the government will hand out £5,000 subsidies for electric cars, although this appears to come from a pre-existing £250 million fund for low-carbon transport.
And there will be cuts, where cuts are politically survivable. One area where they are eminently survivable – unfortunately – is in the aid budget. Oxfam are predicting a £860 million-a-year cut in planned aid, reneging on a 2007 spending review pledge to give £7.5 billion in overseas aid during 2009/10. That would have a severe effect on some projects, which are already being hit by the falling value of the pound.
All the indications are that the Budget will be cautious. The quantitative easing process has barely started, and no-one can yet predict whether it will be a success. Most of the economic analysts I've spoken to, however, do expect the Monetary Police Committee to dig into the second set of £75 billion available to them. Frankly, its success won’t be much clearer in two months, when they appraise the situation, so with nothing improving they'll go for the second pot.
The fiscal stimulus, likewise, is still in the early stages, with the experts out on whether it's making any difference. The European argument – that we need to sit back and see if current policy has had an effect – has almost certainly won the day inside the Treasury offices.
Crueller critics believe caution has been entirely thrown to the wind in the mind of Labour ministers. All that matters now is short-term electoral gain, and any pieces the next government has to pick up are their problem. This analysis has always been overblown, but there is some truth in it. Many previously sympathetic observers of the prime minister wonder where his genuine belief in these methods begins, and his electoral calculations end.
Recent good news, especially on the housing markets, should not be taken too far. Things are still uncertain, and the government knows it. Most experts do expect some kind of net growth in 2010 however. Just how honest and down-to-earth the Treasury will be about this will say a great deal about whether they have learnt from previous mistakes. The rose-tinted outlook the Treasury has stuck to so far has made it something of a laughing stock. With trust in its predictions so low for 2009, it now has room, paradoxically, to be entirely honest, for this year at least.
For the real detail, pay particular attention to the tax receipts. With the rich getting poorer, the government will be bringing in less money than ever. The budget deficit now looks likely to pass 10 per cent of GDP in the coming year– an unprecedented level during peacetime – to stand at as much as £160 billion in 2009/10.
The one policy the government could pursue relatively safely would be a rearrangement of the lower income tax brackets. There is a spectacular level of consensus on this issue. From Ukip on the right, to the Liberal Democrats on the left, people are angry that part-time workers on the minimum wage are still paying income tax.
Not only that, but reform of the lower brackets – either by raising the threshold or creating a new lower base level - would prompt consumer spending. It is exactly this demographic which will spend the money, rather than sit on it. The Conservative's opinion on the matter would be wholly defined by the fact they launched a very high-minded and principled attack on Brown's 10p tax debacle. They could hardly object to reform now.
The temptation on the government to go down this road is huge. But with so little concentration on the Budget until now, surprises are bound to rear their heads somewhere.