Nightmare verdict on ‘unavoidable’ budget

“Somewhat regressive” were the words that the coalition, particularly the yellow half, really would not have wanted to hear from the Institute for Fiscal Studies (IFS). Add in Robert Chote’s questioning of just how “unavoidable” was the VAT rise, and you have pretty much the nightmare assessment from Britain’s fiscal Praetorian Guard.

To some degree the budget itself stole some of the thunder of the traditional flash of lucid honesty that we get from the Institute for Fiscal Studies post-budget briefing. Indeed that may have been the intention.

Two key areas that the Labour Treasury had left for the IFS, were announced in the Budget document itself. The implied, though not announced squeeze on not protected government departments and some analysis of comparative winners and losers were included in the Red Book.

David Cameron was right to boast about this welcome transparency at PMQs, and the credit should go to the chancellor’s chief of staff, who is also a former IFS economist.

However, in both the areas that I critiqued in last night’s C4 News, and blog, the IFS seems to contradict the Budget claims.

On “fairness” the IFS conclusion is pretty concerning for the coalition. As Robert Chote says: “The Budget seems less progressive – indeed somewhat regressive – when you take out the effect of measures that were inherited from the previous government, when you look further into the future than 2012-13 and when you include some other measures that the Treasury chose not to model.”

Now you can have a vigorous philosophical debate about whether a pre-announced Labour plan that is confirmed by the new government should count as a “new measure”. Almost all of the cause of the progressivity that Mr Osborne and Mr Clegg tried to announce yesterday are in fact those measures inherited by Labour.

The IFS produced a devastating graph (Page 17 of this document) showing far from yesterday’s protestations, that in 2014/15 the impact of the new direct tax and benefit measures announced yesterday, cost the poor, and benefited the rich.

And that’s taking no account of the distributional impact of the spending cuts.

George Osborne previewed the extent of the savaging by pointing out an indicative figure of 25 per cent cuts by 2014/15 for departmental cuts in non-protected spending areas such as transport, housing, universities etc. The IFS showed how you get to that number.

Yesterday’s Budget implies an overall cut of 14 per cent to all government departments. Protect health and aid and you get to that 25 per cent number. Partially protect defence and schools (say, a 10 per cent cut) and the Home Office, Business Department, Transport, Universities etc will have to be cut by a mammoth 33 per cent.

The context is that these would be the biggest cuts since before the Second World War. Six years of consecutive spending cuts has never been achieved before, we’ve only ever had two consecutive years before. This will be a challenge.

Then, just how unavoidable was the VAT rise, as the Chancellor mentioned in his speech? The IFS show that the net additional tax rise announced yesterday was £8billion. Or put another way, a £20bn tax rise (mainly a £13bn VAT rise) minus a £12bn tax giveaway.

So to be absolutely clear, in the absence of the tax cuts, the VAT rise was utterly avoidable. Another way to look at it: That the VAT rise was unavoidable because of the coalition negotiations with the Lib Dems.