Life Beyond Debt

Budget 2009

Exactly one hundred years ago Herbert Asquith and his Chancellor David Lloyd George announced a budget with unprecedented redistributive measures. In fact this 'people's budget' created a constitutional crisis as the House of Lords refused to pass the budget. It was the first time since the seventeenth century that the they had challenged the Commons' authority to determine the budget.  In response the Liberal Party took their proposals to the country, won support in the ensuing election and subsequently curtailed the power of the House of Lords through the 1911 Parliament Act.

One hundred years on from this Alistair Darling stepped to the despatch box to issue his second budget as Chancellor of the Exchequer. Having been chastised in the autumn for declaring that Britain was facing its worst financial crisis since the Great Depression he now had to stand before parliament and adjust his forecasts dramatically downwards in reflection of his previous prescient prediction. Last Autumn the Treasury had predicted a contraction of the UK economy by 1.25%, with recovery beginning in the second half of this year. Darling announced that this year's forecast was now for a contraction of 3.5% followed by growth of 1.25% in 2010 and 3.5% in 2011.  

This is clearly an optimistic outlook, with 3.5% growth high even in periods of economic boom, in his response David Cameron suggested that Darling was predicting a 'trampoline recovery'. Even if the projections are optimistic they may instil confidence and encourage investors to see an end to the recession and help speed the recovery. However, if the forecasts for recovery are overly optimistic, as the IMF were quick to suggest, then the projections for public sector borrowing will in turn be understated.

For several days the budget had been trailed as a follow up to Lloyd George's, focused on protecting jobs and helping ordinary people through the recession. The Government were keen to divert attention away from the dreary economic forecasts and in particular any embarrassment over having to downgrade them so dramatically. Perhaps the most galling figure that was presented was the level of public borrowing over the next few years: 12.4% in this financial year and 11.9% in the next. This will leave Britain with public debt of 79% of GDP by 2014 compared to 36% in 2007. If economic growth does not resume as predicted public debt will be even greater. This even compares poorly with the state of the economy when Callaghan's Government had to go cap in hand to the IMF in the 1970s.

Within the budget there were limited measures targeted at helping people back into work, which are perhaps inconsistent with the national insurance increases announced last November making it more costly for companies to employ staff. Last autumn Alistair Darling also set a trap for the Conservative opposition by announcing a new 45% rate of tax for incomes over £150 000. Aware that opposing this measure would allow the Government to paint them as the party of the rich they saw no option but to agree with the proposals. Questions were raised then, as well as over the past few weeks, of the economic efficacy of this proposal, with the Institute for Fiscal Studies in particular casting doubt on the revenue the Government expected to receive.

The run-up to the G20 last month was awash with speculation that Gordon Brown was courting international support for a coordinated stimulus programme. But it was made abundantly clear by the Governor of the Bank of England there simply was no money left for such an approach. It was hoped that international agreement would provide sufficient justification for even greater levels of borrowing to help the country through the recession. It would also give support to Gordon Brown's regular refrain that this is an international economic crisis that requires and international solution. In the absence of a second fiscal stimulus the levers available to Alistair Darling to help the economy were limited, but following the first bout of quantitative easing, or printing money, earlier this year more was announced to inject liquidity into the economy.

Overall, however, this was a budget aimed at protecting Labour's diminishing electoral prospects. Following numerous sleaze scandals and the shameful behaviour of Brown's chief advisor the budget provided the opportunity for the Government to reclaim the political initiative. Yet, as noted above, the possibilities for real fiscal stimulus were incredibly limited. Several small measures were announced to help people who have lost their jobs, those under 25 who have been out of work for 12 months will now be guaranteed work or training and statutory redundancy pay will rise from £350 to £380. One of the few specific measures geared towards stimulating the economy was the 'scrappage scheme' whereby owners of cars that are more than ten years old can receive a discount of £2000 on purchasing a new car. This provides a boast for the auto industry and scrap dealers at the same time.

The Government had carefully dug their 50p tax trap and covered it with sticks, having lured the Conservatives in with the 45p rate in the autumn they probably hoped Cameron would declare his intent to repeal the tax if they win the next election. This would allow them to accuse the Conservatives of only caring for the rich, protecting the wealthy at the cost of the ordinary people who Labour are concentrating on helping in difficult times. Yet the 0.5% rise in National Insurance announced in last year's pre-Budget Report will raise more money for the exchequer with its cost disproportionately effecting the poor, as too will the fuel duty increase, which will also generate more revenue that the new tax rate. Cameron sidestepped the tax trap and suggested to Alistair Darling that the 'scrappage scheme' be extended to politicians ready for the knacker's yard.

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This article first appeared in PQ, the Evangelical Alliance's monthly political newsletter

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