Osborne's crowd-pleasing budget creates new challenges
There was a time when Britain's annual budget was a closely kept state secret. The Chancellor of the Exchequer would disappear into purdah weeks before he told the House of Commons what he proposed. In 1947, the Chancellor, Hugh Dalton, resigned after he blurted details of his budget to the political correspondent of the London Evening Star, which rushed into print before Dalton began to speak. In a TV age, that resignation appears more than old fashioned. It is history.
The British budget now comes in two parts. A finance bill follows the formal budget statement in the spring, but the Chancellor's plans for taxing and spending are revealed in the autumn statement, scheduled for December 3. It is a more dramatic moment than the traditional way of conducting this business. One significant difference is that the idea that the proposals remain secret is laughable.
David Cameron, the Prime Minister, and George Osborne, his Chancellor, seized on the occasion as a pretext for appearing on TV news broadcast for days before the actual event. Osborne walked through hospital wards to announce extra funding for the NHS; at an arts occasion he let slip the plan to help orchestras by exempting them from value-added tax. Cameron went to Stonehenge to tell the cameras about a big road-building program (it includes a tunnel under the great Neolithic stones), and moved on to a river bank to announce plans to spend, spend, spend on flood defences. By Wednesday morning it was hard to think of anything that Osborne might propose that had not been leaked.
The strategy was clear. After being battered by splits over immigration and the EU, the Conservatives are anxious to switch the focus to the economy. That is not without risk. It had been clear for months that the government's spending target has not been met and that the deficit would not fall by as much as forecast. But there is good news to grasp at.
The Chancellor can argue that the economy is growing faster than any other in Europe (3 per cent this year); unemployment is down by 23 per cent in a year; and inflation is under control (1.5 per cent in 2015, falling slightly next year). These statistics allowed the PM and the Chancellor to claim that the public finances are under control, even if the deficit of £91.3 billion is £5bn below target, partly because many poorly paid workers no longer pay income tax.
On Wednesday, when Osborne rose to the despatch box to make his Autumn Statement, there was a collective shrug of the shoulders: what more was there to say? But the general election is only five months away. This was Osborne's last chance to gratify the voters, and it was not an opportunity he was going to ignore.
There were crowd-pleasers: air passenger duty will be scrapped on children (under 12 in 2015; under 16 the following year). It will be considerably cheaper for British families to visit Australia. Employers will no longer pay national insurance when they take on school-leavers as apprentices. VAT exemption will be extended to hospices. Points for the Chancellor.
Tax increases were directed at two of the most flagrant tax dodgers. American high -companies such as Google and Facebook, and coffee houses such at Starbucks, which specialise in transporting profits from Britain to jurisdictions abroad where they pay little or no tax, will now be taxed at 25 per cent of their British profits. Within minutes this had become known as the Google tax.
Greedy bankers took another hit. They have been allowed to claim 100 per cent tax relief on profits to offset losses. Given that losses were so great following the bail-out of the banking industry in 2008, many banks would not have been required to pay any tax for another decade. To correct this, tax relief has been reduced to 50 per cent. More points for the Chancellor.
But Osborne shrewdly reserved the drama for the final announcement in the statement. The tax paid on house purchases is known as stamp duty. It is a clumsy vehicle for raising revenue because a house that costs £249,000 pays £2,490 is duty, while another costing £251,000 is taxed £7,500. Osborne proposes a radical reform that will result in the introduction of a graduated tax on house prices, as happens with income tax. He claims that 98 per cent of home buyers will pay less tax, and that taxes will start to rise only when the cost of the house is greater than £937,000.
Stamp duty reform is good news for anyone who does not live in London, where property values have exploded in the past two years, and million-pound-plus transactions are commonplace. It is also a shrewd move by Osborne because it is an answer to Labour's proposals for a Mansion Tax of £3,000 a year on properties valued at more than £2 million. It is cute politics.
On Wednesday, the government's critics were muted, but the basic problem has not gone away. Osborne repeated his intention to bring the deficit down to zero by the end of this decade without increasing taxes. To do that, and to meet the cost of all the gifts to the electorate, is a challenge, even for a particularly cute politician.