The most dishonest Budget ever?

The Budget speech is pure parliamentary pantomime, but even that was undermined this year by the numerous (and mostly accurate) leaks beforehand.

One surprise came before the budget, when February borrowing figures were published and shown to be far higher than expected at £15.2bn. This meant that there would be no net giveaways in the Budget, and reinforces what we have said throughout: if you really want to tackle the deficit you need to get people working (off benefits, paying tax) and spending (VAT revenues) + deficit closes. Even John Cridland, CBI chief, was on Radio 4 this morning conceding the real problem in the UK economy is lack of demand.

But back to the Budget, and to the theme promised in this blogpost's title: dishonesty. Here's a quick rundown of some fairly serious obfuscation or outright lies:

1) A further £10.5bn of welfare cuts
Osborne was rather opaque in his Budget statement, saying:

"I am today publishing analysis that shows that if in the next Spending Review we maintain the same rate of reductions in departmental spending as we have done in this review, we would need to make savings in welfare of £10 billion by 2016"

In the Budget red book (pp.87-88) the figure of £10.5bn is given by 2016-17 and £6.6n by 2015-16, but there is no specification at all as to which bits of the welfare budget might be targeted. All the red book states is:

"The Government will be examining the cost drivers for all areas of public spending, and identifying the further reforms needed to deliver a sustainable welfare system and public services within the resources available."

Of course the major reform that Osborne could pursue would be to create jobs. The OBR projections show even by 2016 unemployment will still be above 2 million. But what this unspecified £10.5bn shows is that Osborne's economic policies are failing, and - although his sums don't add up - he has already decided those with least should pay for it.

2) The higher rate tax stats
If the 'dodgy dossier' of the Blair government was Alistair Campbell's sexed-up Iraq work of fiction, then this government's own will be this gem from HMRC. All the same questions need to be asked because it looks less like the work of an impartial civil servant and more the work of a Tory researcher, without much in the way of analytical skill or economic nous.

It's major crime is to say it hasn't raised much (and less than predicted), only £1bn. A figure Vince Cable dismissed as not much. Of course that was hindered by £16bn of income shifting - highly paid people bringing forward their pay, bonuses, etc to avoid getting hit for 50% when it came in. In future years, such income shifting is impossible, and the amounts raised would be much higher - the Treasury document seems to think over £3bn per year.

The dodgy dossier talks long and gibberishly about the laffer curve (see our take here) and makes some very spurious conclusions that people avoid a 50% rate at £150,000, but not a 45% rate. Go figure!?

Finally of course is the brass neck with which Osborne, Cameron et al claim their stamp duty reforms will raise five times as much from the rich. Of course there'll be neither avoidance on any of that nor any behavioural changes as a result of these new taxes on selling homes worth £2m or more.

But what is most dishonest in some ways is the contradiction between Osborne's bluster against tax evasion and avoidance - "I regard tax evasion and – indeed – aggressive tax avoidance – as morally repugnant" - and the fact that in the face of large scale (though largely temporary) avoidance of the 50p rate, he has decided to reduce it.

Thankfully though, HMRC tells us, it will only cost us £100m per year. Of course if they have got that wrong (and they have) then we can expect more cuts or more borrowing.

3) The 'Granny tax'
I use the twitter-defined name as a shorthand, but Osborne has done is to freeze age-related allowances - the amount of income over-65s can earn tax-free - for existing pensioners, and scrap the relief for those retiring after April 2013.

This will cost millions of mid-income pensioners about £250-300 per year. It is a stealth tax on pensioners, and come May will probably prove as electorally misguided as Gordon Brown's 75p increase in the basic state pension over a decade ago.

The extra dishonesty factor about this is two-fold: 1) it was the only major item in the Budget not trailed in advance; and 2) Osborne announced it in his statement by saying "we will simplify the tax system for pensioners by doing away with the complexity of the additional age-related allowances".

4) The distributional analysis
Alongside the Budget, Osborne published the 'distributional analysis' to show the effects of the changes he has made on people's incomes (Annex B of the Budget red book).

What it does not include is the cutting of the 50p top tax rate to 45p - which would save someone like Bob Diamond at Barclays over £300,000 per year - as apparently "presenting a static analysis would not be representative of likely actual impacts".

What is also necessarily excluded from this analysis is the yet-to-be-specified but committed to £10.5bn extra welfare cuts which will disproportionately hit the lowest income deciles.

So what we see is an analysis that omits both the big tax break for the rich, and the future hammering of the poor. Convenient.


There are other things in the Budget too that will become clearer in time:

• Osborne promised "growth-friendly planning and employment laws" - which is short-hand for 'the environment and workers' rights be damned'
• The pension age will rise beyond 68: "I can confirm today that there will be an automatic review of the state pension age to ensure it keeps pace with increases in longevity". The problem with this is that increasing longevity is highly unequal, i.e. the richer are increasing their life expectancy at a quicker rate than the poorest. This is doubly bad news since poorer people also cannot afford to retire early, so their retirement gets squeezed, while the rich live for longer in retirement.

Having a Laffer

Earlier this week Mehdi Hasan wrote a Guardian column entitled 'Why are deficit-cutters so afraid to talk about tax?' - a well-argued piece that said taxation should form a bigger part of deficit reduction than it presently does relative to the massive cuts.

It also quoted US judge Wendell Holmes "I like paying taxes, with them I buy civilisation" to make the pertinent point that taxes are what fund everything around us - the pavements we walk on, the schools our children use, the hospitals, the roads, the street lights, etc. A similar point has been made by Tony Benn who argued that suffrage (i.e. democracy) transfers power from the wallet to the ballot - what people couldn't afford themselves they could now vote for at the ballot box. Likewise Richard Murphy makes the case for tax very strongly in his new book 'The Courageous State' (which will be reviewed on this blog shortly).

Like Murphy, Mehdi Hasan wants courageous politicians - ones who will make the case for taxation - and more of it if necessary. As he righty says, "'deficit reduction' has become a convenient euphemism for cutting public expenditure" and "senior politicians of all stripes daren't refer to the T-word in public" as they are decried by the vocal right.

As if to prove that, when Mehdi tweeted* a link to his article it got a near instant response from the right. Toby Young replied "Two words Medhi [sic]: Laffer Curve". This is the argument that increasing taxation rates doesn't necessarily raise revenues, since it might provoke avoidance or damage the economy.

However, the Laffer Curve is not a tool solely of the right. Toby Young - a man whose knowledge and arrogance seem to have an inverse relationship - obviously hasn't read much about the Laffer Curve. If he had he might not be advocating a 70% taxation rate. That according to Mathias Trabandt & Harald Uhlig in 'How far are we from the slippery slope: The Laffer Curve revisited' is the income tax rate after which revenues start declining.

So the left should embrace the Laffer Curve and argue that income tax rates for the richest should rise from 50% - why not make that rate 60%, throw a 50% rate in at £100,000 and let's hit £200,000+ earners with 65%?

If Trabandt & Uhlig are right and revenues do slip off above 70%, then is that a reason not to have them? That might sound like a silly question, but that judgement is based on the assumption that the sole purpose of taxation is to raise revenue. It's not.

The London congestion charge does raise revenue, but its main function is to deter some traffic from central London and achieve what transport planners call 'modal shift' - getting people to use the bus to you and me. And using the bus becomes more attractive when there are bus lanes and clear roads: post-congestion charge and bus lane investment, journey times reduced. Taxation achieved that. Better for the environment, for the economy, and for you and I sitting on the 159.

Likewise the Tobin Tax (aka financial transaction tax or re-branded Robin Hood Tax) was designed to shift behaviour: to deter financiers from speculating on markets (which can have highly volatile and disruptive effects on the real economy) and to instead invest in something productive, like businesses or infrastructure.

So is there a deterrent effect (with a potentially beneficial outcome) reason to go over the peak of the Laffer Curve? Possibly. Let's consider an 80% tax rate on all incomes over £300,000 (about double what the Prime Minister receives or about 1/15th of the average FTSE 100 CEO's salary). Would a company set a salary at £4.5m knowing their employee was receiving less than £1m of it and the rest was going straight to the Treasury?

So, if we could effectively cap salaries at £300,000 (and therefore also reduce the ridiculous pension pots to the super-rich) that money could then be spent more productively - on research and development, or improving the wages or working conditions of general employees. Then the right would cry that British business could not compete. But the German Commerzbank caps its top pay at 500,000 euros or £416,000 - about one-third of what Stephen Hester will receive as his basic salary, even without his now defunct bonus.

*LEAP tweets @LEAPeconomics - follow us on twitter