Let us now sit down and critique our newly announced budget….but first, some context. I shall endeavour to be fair (ish). As a free market economist, and as someone who is prepared to criticize Theresa May just as much as Jeremy Corbyn, I shall assess the effectiveness of the Tories’ budget, ideally without the ‘it’s amazing…hear hear #strongandstable’ rhetoric of a Tory supporter, and the ‘it’s awful and the NHS is in crisis’ rhetoric of a Corbynite. It should also be noted that I am an A Level economist, and thus will occasionally write like one.
Let us begin with Stamp Duty….not a lot to say here. It’s a nice move with good intentions: to benefit first time buyers who inevitably have lower incomes. However, we are faced with a housing crisis. That crisis consists of two things:
- Lack of houses/not enough being built
- High house prices
Is this move going to solve either of those? No, it will not (indeed there is a suggestion that this will increase house prices). But it is certainly a step in the right direction; making it easier to buy your first house. 9/10 for good intentions. 5/10 for positive impact. We would have been naive to expect much more from the Tories in terms of resolving the housing crisis.
Moreover, giving councils the ability to charge 100% council tax on empty properties is another empty move; if you can afford to own an empty house, you can afford to pay the council tax on it. Why not use some government intervention to disincentivize owning multiple homes, thus increasing the supply of homes without having to build anymore.
Moving onto National Living Wage. We see a nice increase here. A Tory theme; nice idea, but it’s not really going to help. A 33p increase per hour is hardly ground breaking, but still, 10/10 for effort.
Growth forecast is down….this shouldn’t surprise us. Although, for those hard line Labour supporters out there, let me give you some A Level economic theory. There is a school of thought that suggests that each nations’ economy has a ceiling. It will only ever be so strong. We have seen the UK’s economic growth slow in the past decade; there are those who believe that is because we are reaching the limit in terms of the size of our economy, whereas a nation such as China that has a far higher year on year growth, still has plenty of growing to do before it too reaches its limit. I’m not saying I support this argument, but it’s an effective evaluation of poor growth forecasts.
The state of borrowing: to explain this, I am first going to provide another A Level economics chain of argument: borrowing money (which both Labour and Tory governments do), is a form of austerity. Let me explain. When a government borrows money, it pays back debt interest on that borrowed money. That means that every year until the government pays back that chunk of money in full, the economy is suffering in the short term. Let’s have a hypothetical example (I like my extreme examples to illustrate a point). A government somehow manages to borrow £100bn. In the short term, they would have a lot of money to play with, and would suddenly be able to fix our beloved NHS, end austerity, and cut income tax for the poorest in our society. In the longer term (15 – 20 years) this would be disastrous. The debt interest on that £100bn would accumulate, and eventually, the lovely little pie chart we get each year on where our taxes go, would be full of one thing: debt interest. It should be noted that each year, the government HAS to pay this back, and they’re not actually cancelling any of the debt; they’re merely cancelling the interest that they have accumulated on that debt. They pay it back in the knowledge that the following year, the debt interest will be a little bit more.
With that in mind, the Tories have committed to borrowing less, which we like, but instead of borrowing money from banks, why not get charming individuals like Lord Ashcroft to pay their tax. As a result, we’ll have to borrow less money, which means less debt interest to come and bite us in 10 years’ time.
For those Corbyn supporters out there, I remind you that solving austerity by borrowing more money is a short term solution. In the long term, it simply leads to more austerity. Another socialist school of thought argue that taxes on the rich should be higher, thus raising more money that we can use to improve the welfare of those worst off in our society. However, I present you with my favourite economic diagram. Behold the Laffer Curve, helpfully illustrated by Mr Tobias Ellwood MP:
It argues that there becomes a point when tax (whether it be corporation or income) should not be raised further, because doing so will decrease tax revenue. Time for another extreme example. Say the government raised corporation tax to 60%. Would that lead to a huge increase in tax revenue? No, because the vast majority of firms and businesses would simply jump ship, and stop operating in the UK….why sell coffee in the UK and have a 60% tax on my profits, when I can sell coffee in Switzerland and only pay 17%! Another crazy example, but tax revenue statistics over the past few decades support this idea.
Other key points: some nice moves to address issues with welfare and pensions, but as ever, is it enough to make a difference to peoples’ lives? Perhaps not.
Lots of investment in future technology such as 5G mobile connectivity, and electric cars. One thing to note on electric cars; you may feel very good about yourself because you own an electric car, but if the electricity powering said car has come from a non-renewable energy resource, you are killing Mr Polar Bear just as quickly as you are when driving a petrol powered car. The government not only need to invest in electric cars, but sustainable ways to produce said electricity.
£2.8bn more for the NHS: this falls short of what the NHS needs, but again, a good move, and a step in the right direction. More money is needed for our NHS, but this is a good move, and will make a difference.
No mention of HS2, or a 3rd runway at Heathrow. One word on large infrastructure projects in the UK; as a society, we suffer from Nimbyism (Not In My Back Yard….ism). China is a nation with many flaws. But they get stuff done. When they decide to build an airport, they choose a location, give those who will have to leave their homes some money, and then build the airport. From mentioning building the airport to the first plane landing in 10 years at most. They get stuff done, and it’s good for their economy. In the UK, it has taken us 3 decades to get anywhere near building a new runway. Obviously, we shouldn’t be like China, but nimbyism is hypocritical; I’d love another runway so I can go on holiday quicker and for less money, but just don’t build it near my house.
Parting remarks; a solid 6/10 for effort from the Tories today. However, much of what has been announced will have a minimal impact. As others have said, the theme of the budget is ‘too little, too late’. The budget isn’t a ‘total disaster’ as I’ve seen some people argue, but nor does it ‘build a Britain fit for the future’ as the Tories are arguing.