Duncan’s Economic Blog

Three Budget Thoughts

Posted in Uncategorized by duncanseconomicblog on March 24, 2011

I’ve got some Budget reaction going up at False Economy today.

Three other points, which didn’t seem right for there:

I claimed on Monday that ‘the wrong sort of inflation’ couldn’t explain ‘significantly’ higher borrowing. I’m pleased to say the OBR agrees. Table 4.18 tells us that higher inflation is adding £5bn to social security bills over the period, table 4.19 reveals that it will add £1.8bn to tax credits, 4.20 gives a figure of £1.6bn on public sector pensions and 4.21 shows £3.3bn on debt interest payments – for a ‘wrong sort of inflation’ figure of £11.7bn. Against borrowing revised higher by nearly £45bn.

– I rather suspect that the macro impact of yesterday’s Portuguese Budget, which was defeated driving Portugal closer to an EU ‘bail out’ will be somewhat larger than the UK Budget.

–  Finally, given that the OBR says the corporation tax cut will have ‘minimal impact’, I’m rather annoyed at the media giving a free ride to business leaders welcoming the tax cut and saying what a good thing it is.

If Osborne wanted to spend £1bn to increase growth there are much better ways to do this (higher public investment for a start) – of course this wouldn’t have gotten him the heads of the CBI, IoD and BCC praising him anywhere near as much today. A political rather than an economic policy.

14 Responses

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  1. Liam Murray said, on March 24, 2011 at 10:43 am

    Just to be clear the OBR point out throughout that they received notification of the corporation tax cut too late to fully embed it in their modelling & forecasts. Yes, they then point out they think the impact minimal anyway but that’s not a properly modelled assessment. And given that inside 24 hours we already have stories of companies considering a return to the UK (inc. the worlds largest advertising agency) it would seem unreasonable – to me at least – for anyone to dismiss this change.

    And I wouldn’t be too ready to separate the political & the economic – public investment is, of course, an alternative but getting the heads of the CBI, IoD and BCC onside isn’t without consequence either.

    • Mike said, on March 24, 2011 at 6:20 pm

      In terms of growth, the benefits of the reduction in corporation tax are minimal. The benefits of worsening employees’ terms & conditions (regulation changes) are also minimal. The CBI, etc, are not a business lobby. They lobby on behalf of high earners who anticipate trousering more cash. Hence their first priority is the reduction of the highest personal tax rate.

      And the business leaders courted by Cameron and the media? Supermarkets. More supermarkets is not what the country needs.

      As for Sorrell (who recently trumpeted a return to where Thatcherism left off): of more import than corporation tax are Osborne’s schemes to boost tax avoidance by multinationals and offshore companies. These will not bring growth, just less tax revenue.

  2. Dave Holden said, on March 24, 2011 at 11:38 am

    Much as I enjoy reading your blog I have to say that given it’s heavy focus on the “political”, to point out that part of the budget was mainly a “a political rather than an economic policy.” is a little rich🙂

    On the OBR – how valid is their model, i.e., how good have their predictions been over the medium term. I pose the question because we should only be basing policy around their forecasts if they have a reasonable track record. (BTW I don’t know the answer)

    On debt, so far Greece, then Ireland and now Portugal have been forced to face up to unsustainable debt levels. I would suggest that those in glass houses should be too dismissive of those bond vigilantes .

    • duncanseconomicblog said, on March 24, 2011 at 11:57 am

      Fair enough on the first point! Plan on do some more economicsy economics next week!

      I agree on Greece/Ireland/Portugal – not sure the UK needs to default though – very different dynamics – lowere debt stick, long maturity, low borrowing rate.

      • Dave Holden said, on March 24, 2011 at 12:53 pm

        No I agree I don’t think default is in the near term but the direction of interest rates is anyone’s guess.

  3. Tom P said, on March 24, 2011 at 12:45 pm

    “And given that inside 24 hours we already have stories of companies considering a return to the UK (inc. the worlds largest advertising agency) it would seem unreasonable – to me at least – for anyone to dismiss this change.”

    Isn’t Martin Sorrell is a long-standing Conservative supporter? Don’t you think with WPP it might be a case of ‘Conservative supporter backs Conservative Budget’?

    • Liam Murray said, on March 24, 2011 at 12:47 pm

      Perhaps but I’m more interested in the consequence of his decision than the motivation behind it? Surely that’s more pertinent?

      • gastro george said, on March 24, 2011 at 2:18 pm

        Another step in the race to the bottom on corporation tax that only suits the multinationals?

      • Andreas Paterson said, on March 24, 2011 at 2:18 pm

        “Perhaps but I’m more interested in the consequence of his decision than the motivation behind it?”

        To put a positive spin on the budget for the Tories. Perhaps you think that’s being excessively partisan, but how else do you explain the timing?

        • Tom P said, on March 24, 2011 at 2:44 pm

          Exactly. The consequence is that the media run with “WPP to move back to UK in response to Budget” which I’m sure was Sorrell’s intention.

          It will be interesting to see how WPP reports on this in its annual report & accounts since to move domicile twice in rapid succession in response to changes in corporation tax looks a bit short-termist.

          • Liam Murray said, on March 24, 2011 at 10:14 pm

            No, that’s a secondary or tertiary consequence, not the primary one. That would be the return of the world’s largest ad agency to the UK and all the employmeny & tax implications that follow.

  4. stephen said, on March 25, 2011 at 1:46 pm

    Duncan

    Are you aware of any research on who benefits from Corporation tax reductions in the UK – given that the Tories have now put in a timetable to reduce it from 28% to 23% perhaps who are the beneficiaries from such tax cuts is worth a little examination. I very much doubt it is those in the lowest decile and my guess it is trickle down economics yet again.

    • duncanseconomicblog said, on March 25, 2011 at 1:54 pm

      Will have a look.


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