Feature: Should Osborne splurge in Budget 2012?
Despite everything, George Osborne is thought to have some spare cash to play with for this year's Budget. What's he going to do with it?
By Alex Stevenson Follow @alex__stevenson
It's Budget build-up time. The first three weeks of March are the key period when, behind the scenes, key decisions about the public finances are made which will fundamentally affect the UK economy's prospects for growth.
There is nothing worse for a government's credibility than a recession. So you'll understand their concern that technically, at least, there is a chance we are in one right now. All it takes is two consecutive quarters of negative growth. As the economy contracted in the final three months of 2011, the double-dip nightmare will have become reality if we don't return to growth in January, February and March this year. If anything keeps George Osborne awake at night, it's probably this.
Fortunately for his beauty sleep, things are not looking as bad as they once did. "If you ask me today, it looks less likely that the economy will shrink in the first quarter than it did in November," says Tony Dolphin, chief economist at the centre-left think tank IPPR. But he concedes there's not much difference between -0.1% and +0.1%. And, as Labour's shadow chief secretary to the Treasury Rachel Reeves points out, things are "still an awful lot worse than the government promised us they would be".
That's the context, then, in which the chancellor and co are preparing this year's Budget. The 'quad' – David Cameron, Nick Clegg, Osborne and Lib Dem Danny Alexander – are negotiating their way through a package of measures which, they hope, will make a real difference – and keep their backbenchers happy.
At the heart of the matter is a question: what should they do with an unexpected bonus which has fallen into their lap? Thanks to better-than-expected tax receipts, it's estimated the government's deficit this year is expected to be between £8 billion and £10 billion less than was predicted in last November's autumn statement.
It's a bit like trying to lose weight and discovering you've dropped off several more pounds than your personal fitness trainer had told you to. What do you do – splurge out on some chocolates, and slip back to where you were supposed to have been? Or keep on with the belt-tightening to stay ahead of schedule? Osborne might just be convinced that anything he does to stimulate growth, while keeping within the rules of 'plan A', would justify the splurge.
(Actually, it's even more complicated than that. He's only ahead of the game based on last autumn's figures. His original deficit reduction plan was more optimistic – and according to that he's barely on track. So it all becomes a question of where your starting line is. There's lies, damned lies and then there's statistics.)
If the chancellor does decide to go for the spending splurge option he's got some tough decisions to make. Labour is calling for a cut in value added tax (VAT), which is currently at the painfully high level of 20%. Reducing it back down to 17.5% would put money into the economy straight away, says Labour's Reeves. She adds it would help families "struggling with the rising cost of living". But it would also be only partially effective, as any money spent on products made outside Britain wouldn't help those all-important GDP stats.
The Liberal Democrats' favoured option is to hurry up with raising the level at which low-paid workers start having to pay income tax. The coalition has committed to increasing this to £10,000 by the next general election in 2015. They've made a start, but the Lib Dems want to hurry the process along. It's the "number one tax priority of the new government", their backbench Treasury spokesperson Stephen Williams insists. Forget the Tories' plans to cut inheritance tax, or proposals to shake up the marriage allowance. This is the one tax policy they care about more than any other.
A large number of Tories don't mind this approach too much. It seemed a small price to pay for the Lib Dems propping up the coalition during May 2010's negotiations, and it still doesn't look like a bad deal now.
But there remains a lot of disagreement over how the raised income tax threshold should be paid for. "I think the trade-off would be more taxes on the wealthiest in society in order to fund this tax cut for the broad mass of taxpayers," says Williams enthusiastically. Lib Dems want to tax the rich through measures like their mansion tax on properties worth over £1 million (most of which are in London and the south-east). They also wouldn't mind scrapping tax relief on pension contributions for those earning over around £48,000, either.
Douglas Carswell, a Tory backbencher, disagrees with both this approach and Labour's preferred VAT cut. He is simply contemptuous of the latter. "Reducing tax on consumption in order to stimulate more consumption when you're in a crisis caused by over-consumption – it's just not the right thing to do at all," he says. "The less said about that implausible, incredible position the better."
How about the Lib Dems' Robin Hood act, then? It's true that the income tax threshold would stimulate growth, but it has the same flaw as a VAT cut in that some of its boost would find its way overseas. What Carswell wants to see are steps which give struggling businesses more direct assistance. That £10 billion could reduce the overall corporation tax burden by 25%, for example. "We shouldn't be squeezing the rich so you can give tax breaks to the poor – it should be getting government off everyone's backs," he says.
As usual, the Budget build-up period is punctuated by letters from angry, earnest coalitions of business figures and others calling for steps which will foster growth. Pressure to scrap the top rate of income tax – 50% for those earning over £150,000 – are proving particularly controversial. These make up just one per cent of taxpayers, but they contribute 24% of income tax. The Tories hate the idea of penalising these 'wealth creators' by making them pay for success. It looks increasingly like the Lib Dems would let them scrap the 50p rate in return for the introduction of the mansion tax, for example: business secretary Vince Cable says there's a "broad understanding" in Cabinet that this is what is going to happen.
That's exactly the sort of horsetrading we can expect behind closed doors in the Treasury over the next few weeks. But we'll have to wait until March 21st before finding out just what the chancellor has in store for Britain.
