In accordance with the Code for Fiscal Stability of November 1998, it has been the recent practice of the British Government to publish a Pre-Budget Report (PBR) each autumn, updating the nation on the progress made since the last Budget as well as providing a foretaste of the delights to come in the next Budget due in the following spring. It therefore came to pass that on Wednesday, 9th December 2009 Chancellor Alistair Darling rose to his feet in the House of Commons to deliver his speech introducing this year's Pre-Budget Report. Given that his previous Budget, delivered only a few months previously, had revealed the parlous state of the nation's finances, with the country now running a record-breaking deficit of £175 billion, naturally there was some interest expressed in what, if anything, the Chancellor might have to say on the current state of affairs.
There was confirmation that the Government's anti-recession measures would be coming to an end as planned. Therefore VAT would be returning to its previous level of 17.5% on the 1st January 2010, on which day the stamp duty holiday would also end, despite the fact that the nation stubbornly remained in recession and indeed was the only major economy that had as yet failed to show any signs of recovery. Chancellor Darling was also obliged to admit that he now expected that the economy would shrink by 4.75% in 2009, as opposed to the 3.5% he forecast back in April. This was no real surprise to anyone, as few believed his forecast back in April, but nevertheless Darling persisted with the idea that the economy would bounce back in 2010, and would indeed enjoy the super-charged growth of 3.5% that he had predicted for 2011 and 2012. Nevertheless there was some good news, as the predicted outcome of the fiscal deficit for the current year was a deficit of £178 billion, which was only £3 billion worse than the number first thought of, whilst the estimated cost of the bank bailouts was now £10 billion rather than £50 billion, which was a relief.
There were the usual Treasury gimmicks, with the announcement of a boiler scrappage scheme to complement the existing car scrappage scheme, whilst there was also an announcement that those households who used renewable technology to "generate electricity mainly for their own use" would not be subject to income tax on the proceeds. There was no mention of how many people would benefit from this latter measure, presumably because the answer would have been 'none whatsoever', since it was extremely unlikely that any self-generators would have paid tax anyway. But never mind. It made the Government look green and gave the impression that it was giving something away.
The PBR however contained two big announcements. The first was the expected Bankers' Bonus Tax to be levied at a rate of 50% on all "discretionary bonuses" over £25,000, and to be paid by the banks rather than the individuals concerned. This was planned to raise some £550 million, but since the government now effectively owned a significant chunk of the banking sector, it was effectively taxing itself. Of course, this tax only applied to bonuses paid before April 2010, and so the banks in question only had to defer payment for a few months to avoid the tax, but then as the cynics noted, persuading the banks to defer the payment of bonuses until after the date of the next General Election was likely the whole point of the exercise. The second big announcement was the decision to increase National Insurance contributions by a further 0.5% in 2011, on top of the 0.5% increase already in the works for 2010. This was not expected, and was regarded as something of a 'surprise'.
Generally speaking however, there were certain expectations that the Pre-Budget Report would fill in some of the blanks left by the previous Budget and provide some further detail as to how Chancellor Darling proposed cutting government spending to meet the target of having the deficit over the life of the next Parliament. Sadly anyone with such an expectation would have been cruelly disappointed, as Darling spent more time telling the nation which areas of spending would be protected from cuts, rather than explaining where the axe would indeed fall. Even the additional revenue arising from the increase in National Insurance rates was to be devoted to help fund some £15 billion's worth of extra spending rather than actually reducing the record-breaking deficit. Roger Bootle christened it the 'Phoney Budget Report' whilst Martin Weale of the National Institute of Economic and Social Research gave it "about 3 out of 10" as he explained that "It all hangs on the growth forecasts and nothing is ever said about what will happen if it doesn't turn out as hoped".
The decision to increase National Insurance contributions came in for particular criticism. The director-general of the CBI Richard Lambert, believed that this "extra jobs tax" was a "serious mistake" which would "hold back job creation and growth" whilst Stephen Robertson, director-general of the British Retail Consortium, was more blunt and described it as "madness". They were not alone either, as according to The Independent "senior Treasury sources" shared this concern. Indeed on the following day, both the BBC and The Guardian alleged that there had been "sharp disagreements" in the Cabinet over the contents of the PBR, and in particular the decision to increase National Insurance rates. Naturally the official word was that "there was absolutely no disagreement on maintaining spending for 2010-11 and no disagreement on halving the deficit in four years", which if true would have been the first time in history that a British Government had ever issued any kind of Budget statement without there being some kind of fisticuffs in Cabinet.
But despite the official line of peace and harmony it appeared that Darling and the Treasury had wanted "tougher action" to tackle the deficit, and in particular had wanted to increase VAT to 20% as a means of raising additional revenue. This had however been over-ruled by Gordon Brown who insisted that National Insurance rates should be increased instead and what was more, rather than using the money to reduce the deficit, he insisted that it should be used to maintain public spending. At least for certain favoured departments, such as the Education department run by Brown's favoured son Ed Balls. The nature of the intra-cabinet discussions over this issue appeared to so intense that it was claimed that at one point Darling got so fed up with Ed Balls's persistent lobbying that he went to bed and refused to take any more of his calls.
In the circumstances it was therefore perhaps not much of a surprise that the end result did not come up to expectations, with the general consensus being that the PBR was not up to scratch. Indeed back in April the BBC had summarised the reaction to the Budget by reporting that there was an "overwhelming sense" that it had "fallen short of what had to be done". It was no different this time round as the papers generally concluded that the Government had simply avoided answering the difficult questions, and decided to defer the whole issue until after the election. When, of course, it might well turn out to be somebody else's problem. 'Pain postponed' said The Independent; 'The axeman ditherith ... but the taxman cometh' said The Times; 'The Buck Passer's Budget' said the Daily Mail, 'Middle Classes hit hard' added the Daily Telegraph, as the Daily Express trumpeted 'Labour's War on Workers'. The Sun came up with the headline 'Darling just screwed more people than Tiger Woods', and although this headline was in the true tradition of that particular newspaper, The Guardian said much the same thing with 'Darling soaks the rich and the rest of us too'. Only the lonely figure of the Daily Mirror which hailed the 'Return of prudence' had a good word to put in for the Chancellor.
Perhaps the Independent summed up the mood in its leading article entitled 'The glaring hole in this pre-Budget report' in which it noted that Alistair Darling had "not explained how he would cut the structural deficit" and that throughout the document it was the "political argument was paramount" as the Government readied itself for the coming election rather than actually tackling the nation's number one problem. Or as Vince Cable, of the Liberal Democrats, put it: "What we needed was a national economic plan and what we have got is an election manifesto". Elsewhere in The Independent, John Rentoul was even more scathing as he concluded that it all meant that Labour was "unelectable again" and that the Party was being ""propelled into the wilderness" by Brown, and that his "cunning masterplan" was to ensure that "anything of value utterly destroyed". Or to put it another way this really was "The End of New Labour, No It Really is All Over, It Is Much Worse Than You Think".
Shortly before Christmas the Daily Telegraph claimed that the PBR had "raised deep concerns among Chinese, Arab, and Russian investors about the credibility of the British state". Which if true, would be very bad, as it was the Chinese, Arabs, and Russians who had the money the Government needed to fund its deficit. It was noted that the yield on 10-year gilts had risen since the PBR to almost 4% by the 23rd December 2009, being 0.5% more than on French debt, and putting UK debt in the same bracket as Italian debt. Of course thanks to Quantative Easing, the Bank of England had over the previous nine months bought more gilts than the Government had issued, thereby magically solving the Government's financing problem at a stroke. It was widely accepted however, that Quantative Easing would soon be coming to an end and that some time during 2010 there would be a veritable mountain of gilts for sale. And as Simon Ward, chief economist at fund managers Henderson, pointed out, the Government's interest projections were "based on optimistic assumptions about interest rates given the big increase in gilt supply that's coming over the next year". It really Is Much Worse Than You Think.
SOURCES
- The pre-Budget report at-a-glance, BBC News, 9 December 2009
http://news.bbc.co.uk/1/hi/uk_politics/8403636.stm
- Larry Elliott and Patrick Wintour, Darling soaks the rich and the rest of us too, The Guardian, 9 December 2009
http://www.guardian.co.uk/uk/2009/dec/09/darling-soaks-rich-and-us
- Alistair Darling puts off spending cuts - but sends in the taxman, The Times December 10, 2009
http://business.timesonline.co.uk/tol/business/economics/pbr/article6951039.ece
- Leading article: The glaring hole in this pre-Budget report, The Independent, 10 December 2009
http://www.independent.co.uk/opinion/leading-articles/leading-article-the-glaring-hole-in-this-prebudget-report-1837149.html
- Steve Richards, Pre-Budget report: Pain postponed, The Independent, 10 December 2009
http://www.independent.co.uk/news/uk/politics/prebudget-report-pain-postponed-1837367.html
- Andrew Porter and Alastair Jamieson, Alistair Darling accused of 'pre-election con' over benefit rises, Daily Telegraph, 10 Dec 2009
http://www.telegraph.co.uk/finance/financetopics/budget/6776632/Pre-Budget-report-Alistair-Darling-accused-of-pre-election-con-over-benefit-rises.html
- Darling accused of 'pre-election con' over benefit rises in Pre-Budget Report, Daily Mail, 10th December 2009
Read more: http://www.dailymail.co.uk/news/article-1234705/Pre-Budget-Report-Darling-accused-pre-election-benefit-rises-in.html
- Patrick Wintour, Gordon Brown blocked Alistair Darling's plan to increase VAT, The Guardian, 10 December 2009
http://www.guardian.co.uk/politics/2009/dec/10/brown-darling-vat-increase-plan
- Treasury plans for tougher cuts 'overruled by PM', BBC News, 11 December 2009
http://news.bbc.co.uk/1/hi/uk_politics/8407318.stm
- Matt Dickinson, 'Darling overruled' on tougher Budget, The Independent, 11 December 2009
http://www.independent.co.uk/news/uk/politics/darling-overruled-on-tougher-budget-1838348.html
- Philip Webster and Emily Ford, Britain's credit rating threatened as Cabinet finances row emerges, The Times, December 11, 2009
http://www.timesonline.co.uk/tol/news/politics/article6952864.ece
- John Rentoul, Labour is unelectable again, The Independent on Sunday, 13 December 2009
http://www.independent.co.uk/opinion/commentators/john-rentoul/john-rentoul-labour-is-unelectable-again-1839320.html