So Has Plan A Been Ditched?

The credit rating agencies are likely to fall for it – Fitch has warned that the UK may lose its triple A rating in the next two years – but does Goerge Osborne’s Budget make much sense, if he’s wedded, as he says he is, to his Plan A of stiff public spending cuts?

There are some substantial giveaways in the Budget – the top rate of tax cut from 50 percent to 45 percent, an increase in the personal tax allowance, and the raising of the income ceiling  on child benefit, etc. And, of course, there’s the cut in corporation tax.

The Chancellor says this is a Budget on the side of aspiration and enterprise. Certainly, to attract foreign business to the UK, and to encourage domestic firms to remain located in the country, the corporation tax reduction is a good idea. The cut in the top rate of tax is likely also to encourage the super-wealthy to remain.

But how is this to be paid for? The Chancellor talked vaguely about clawing back another 10 billion pounds in welfare benefit cuts annually but absolutely no details were provided.

One slice the of the population that doesn’t come out of this well is the elderly. The phasing out of the age related allowance for pensioners is going to hit them. I can’t quite see the sense of this.

The UK is facing already a pension time-bomb, as other developed countries are too. UK pensioners and those close to pension age have been hard hit by low interest and annuity rates since the financial crash and now they will lose out on the phasing out of the age related allowance. In short, the government is aggravating the problem that will come with the greying of the country.

So, is this Plan A-? I am not sure the Chancellor has done enough to encourage growth and enterprise with this Budget – a growth that can bring in more tax revenues to cover the giveaways. And neither am I sure this Budget will be as tax neutral over five years as the Chancellor claims it will.

Things Can Only Get Worse

Recall the theme song New Labour blasted out in 1997 as it savoured its election victory — Things Can Only Get Better? Well that seems to be the promise that Chancellor Alastair Darling offered in his grim annual Budget delievered today. While outlining the full depth of the economic crisis that still might have the UK having to go cap in hand to the IMF, Darling forecast that the British economy would revive next year with a rapid bounce-back, modest at first with a 1.25 percent growth rate and subsequently rising to 3.5 percent in 2011.

Trouble is, no one with any credibility is predicting such growth rates.

The Bank of England’s forecast for 2011 is 2.5 percent. In its latest World Economic Outlook, the IMF saw no growth for the UK on the horizon next year, arguing that the British economy would continue to shrink. The IMF and Darling are at odds also about the forecasts for this year. The Chancellor maintained that output would shrink by 3.5 per cent 2009 – more than doubling his previous forecast. But the world body believes that 2009 will be even harsher for the UK and is forecasting a slump of 4.1 percent.

Those percentage differences may look small but they will have tremendous consequences for how Britain fares in its attempts to borrow the money it needs to cope with the bank bail-outs and increasing government spending.

The markets reacted even before the Chancellor finished delivering the Budget. The price of British government bonds plunged as investors learned the government will be looking to raise 240 billion pounds this year, far more than expected. Most analysts thought the government would be looking for 180 billion pounds. The pound also fell in value on the currency markets.

And taxes…forget 45 percent for high earners. The Chancellor announced a top rate of 50 percent. Belgium looks cheaper, especially with better public health care!