March 24, 2014
History is unlikely to be kind to George Osborne. Four years after he became Chancellor, the national debt has exploded, the budget deficit remains at dangerously high levels and an increasing share of tax revenues must be devoted to repaying creditors.
The government also faces enormous long-term liabilities which currently do not appear in the national accounts. These include pensions and healthcare commitments that are spiralling due to a rapidly ageing population. The liberalisation of pension regulation announced in today’s budget, while welcome in itself, will not make a significant contribution to resolving this problem. Indeed, other government measures, such as the triple-lock on state pension increases will greatly exacerbate the long-term fiscal shortfall. Similarly, while the Chancellor was correct to focus on poor incentives to save, the impact of policies such as expanding ISA allowances will be trivial compared with the negative effects of loose monetary policy and new disincentives to save introduced as part of the government’s flagship welfare reforms.
To add to the demographic challenges facing the UK, a series of policy decisions, implemented for short-term political gain, have done lasting damage to the future prospects of the economy. One of Osborne’s first moves was to raise harmful taxes such as VAT in a misguided attempt to reduce the budget deficit and avoid additional spending cuts. It has backfired spectacularly by suffocating economic activity, dampening the recovery and as a result actually increasing government borrowing. And despite the depth of the recent slump, the burden of regulation on business has been increased. Tax and labour-market legislation has become even more costly for firms, while energy prices have spiralled due to government intervention.
The budget failed to tackle these problems. Yet more complexity was added to the tax system: another ill-conceived crackdown on tax avoidance was combined with a series of bizarre tax breaks for favoured sectors. Disappointingly, there was no rolling back of employment rules that are hindering business activity, such as mandatory workplace pensions, the Equality Act and the National Minimum Wage. And instead of reversing the government’s incoherent green energy policies, the Chancellor treated the symptoms rather than the cause of high bills by announcing special help for the heavy manufacturing sector.
But perhaps the most worrying blunder of all is the expansion of Osborne’s policy of subsidising borrowing to ‘stimulate’ the economy. His ‘Help-to-Buy’ scheme may be effective at winning votes from certain target groups, but it is potentially very dangerous indeed for the medium-term stability of the UK economy. Asset prices are already severely distorted by the Bank of England’s policies of low interest rates and quantitative easing. The Chancellor’s sub-prime subsidies risk further inflating the housing market: more households will take on debts that could become unaffordable should interest rates return to normal levels. Thus significant default risk has been loaded onto taxpayers. There are also potentially very serious implications for the banking sector should government policies ignite another boom-bust cycle.
Indeed, there is a strong argument that a significant part of the current economic recovery is artificial in the sense that it has been generated by the easy credit policies of both the government and the Bank of England. Sceptics might point out that politicians have often boosted the economy in the run-up to general elections. The long-term consequences have usually been dire.
Reuters, 19 March 2014