VAT rise was not ‘unavoidable’

• The Chancellor has lanced the boil of the fiscal crisis. Britain’s AAA rating is safe
• But he has done more than necessary to meet his fiscal target, so the VAT rise was ‘avoidable’
• George Osborne’s new fiscal mandate has curious echoes of Gordon Brown’s old one
• And the Budget overstates the progressivity / fairness of today’s measures

Two years after the crisis: the bill has arrived. And we are all paying. Everybody from the teenager on housing benefit to the public sector worker to the banker cashing in his bonus.

The Treasury reckons in April 2012 we’ll be on average about £400 a year worse off as a result of all these measures. That ranges from £200 worse off for the poorest tenth, and £1,600 for the richest tenth.

Another way to look at this: how much we’ll lose as a percentage of our incomes – from the poorest 10 per cent of the population to the richest 10 per cent. The top 20 per cent of the country, those earning above £38,400 do lose the most as a share of their income – so that’s progressive. But it’s the bottom 10 per cent – the poorest people in the UK, earning below £14,200, who are the next biggest losers, on the Treasury’s own figures.

A big health warning on this: These are the Treasury’s own numbers, an attempt to self-assess winners and losers, or here losers and losers. They have chosen a flattering year in April 2012, before many of the most acute welfare cuts kick in.

Perhaps bizarrely, it includes many preannounced Labour policies, such as national insurance rises, that clobbered the rich. Strip them out and the actual impact of today’s new policy will be even less progressive, maybe not at all progressive.

I know that some senior Osborne allies were joking today that the Institute for Fiscal Studies had been put out of a job. However, I’d wait until tomorrow before concluding that today’s numbers are “progressive” or “fair”.

As I pointed out last week, the apparent impact of its budget on the economy makes difficult reading for the coalition. The independent Office for Budget Responsibility forecast just a week ago that economic growth over the next five years would be 2.6 per cent in 2011, then 2.8 per cent, 2.8 per cent and 2.6 per cent.

The OBR, after the budget now says the economy is forecast to growth will be slower this year and next and then faster thereafter. Slower growth brings higher unemployment. The claimant count is 100,000 higher at the end of next year, and stays higher throughout the next five years.

In his speech the chancellor cautioned against direct comparisons like this. Nonetheless they illuminate the big risk for him: that austerity itself could hamper the recovery. It’s worth noting that when Japan in the mid-1990s tried to halve the deficit partly through raising VAT, it ended up doubling the deficit by killing growth.

However this was pain for a purpose, and the chancellor will be heartened by the warm reception today from credit rating agencies and the OECD as record levels of government borrowing drop.

Essentially the £73bn fiscal consolidation planned by Labour for 2015 has been super-sized by £40bn by George Osborne. Of that £40bn, £8bn comes from higher taxes, which is the VAT minus some tax giveaways. Of the £32bn in cuts that remain, a third or £11bn is from the axe to the benefit system. The OBR has indicated £17bn more in departmental cuts by 2015.

In unprotected areas such as housing, business, transport and universities that will mean a 25 per cent cut over four years, which means an enormous 30 per cent in some departments, all from current spending. Bigger than Thatcher, bigger than the IMF-led retrenchment.
Yet even this hasn’t solved the deficit.

Labour expected the deficit at a mammoth £163bn this year falling to £74bn at the end of the parliament. The coalition cuts into that in every year halving the previously forecast deficit to £37bn by 2015. In total, Britain will borrow £115bn less over the next five years, but we’ll still have a deficit.

Mr Osborne says we’ll actually be in surplus on our current budget – that’s all spending APART from capital expenditure on things like roads and housing.

That is the chancellor’s own target: which has echoes, shall we say, of Gordon Brown’s famous Golden Rule that we can “borrow to invest”. Treasury sources point out an important difference that it will be “forward-looking rather than backward-looking”.

Most important, the chancellor over achieves the target, the fiscal mandate that he set for himself, by one year. The chancellor did not have to raise VAT to hit the target. He has raised it to fund council tax freezes, corporation tax cuts, and the Lib Dem fairness agenda. (And perhaps a tax on consumer spending is part of the great rebalancing of the British economy).

However, if all goes to plan, that would leave Mr Osborne £10bn wriggle room in 2015.
The Treasury would call that “caution”. Some might see it as a pre-election warchest.