June budget: now we know how bad pain ahead will be

He’s VATman, the benefit basher and public spending slasher! Or he’s a responsible and fair-minded chancellor, making sure (he hopes) that Britain is living within its means, borrowing only for capital spending and nothing else by the end of this Parliament, upping Labour’s deficit repair job by 60 per cent, adding £40b to the fiscal consolidation and protecting the state pension and poorer households’ child tax credits into the bargain. You takes your choice.

There’s an interesting chart on p.67 which is the government’s case for being redistributive. The argument goes that this shows tax and benefit changes are progressive… but public sector cuts (even without the massive £12b cut in the welfare budget) hit the poorest greatest, and a first stab at their impact was done by yesterday’s FT.

Those on benefits take a huge hit in this budget. If you’re on housing benefit you could get a mighty cut in your claimable allowance as the government will be looking at 30 per cent of average rents in your area as a guide not the current level of 50 per cent.

And then there’s the RPI/CPI switch for benefits (not, note, for taxes… also not for gilts!). CPI tends to be 1.5 per cent below RPI. Alistair Darling says the Treasury regularly offer up this switch to Chancellors looking for money but it has in the past been knocked back on grounds that it would look like a bit of low cunning.

The coalition argues that it is good sense as CPI better reflects the spending profile of those on benefits. (The CPI excludes a number of items that are included in RPI, mainly related to housing. These include council tax and a range of owner-occupier housing costs such as mortgage interest payments, house depreciation, buildings insurance, estate agents and conveyancing fees.) Housing costs take up a smaller percentage of the basket and those on benefits, the Treasury argues, have lower housing costs. Well, they did before the housing benefit was slashed.

You can see the relative performance of RPI and CPI here.

The coalition after much bartering behind the scenes has split the difference on CGT rises, going for a hike to 28 per cent rather than the 40 per cent the Lib Dems were looking for (it was at 18 per cent and still is until midnight tonight). HMT advice was that if you put it up any more than 28 per cent you stop maximising revenue.

VAT will do some of the heavy lifting in this budget – the tables suggest it’s meant to bring in £13.5b by 2014-15. The Tory election line of “no plans to increase VAT” looks a little implausible now to some. They’ll say they needed it to help with the Lib Dem tax threshold rise and the Lib Dems appear to have put up little fight against a tax hike they campaigned furiously against in the election.

Back in the election, public sector workers were told of a pay freeze for one year. Now it’s two. They won’t learn anything about their pensions yet but John Hutton’s review has little option but to increase employee contributions and they now know they’ll be doing that from an even smaller pay packet.

George Osborne has tried to front-load the pain, to work with the electoral cycle and keep events as close as possible to the last government so the blame can be pinned on them. Now his MPs can look at a £8.2b next tax hike and the Lib Dems can work out how six weeks have transformed them from a party of protest to a party that has to shoulder responsibility for the most painful budget in living memory. £113b fiscal consolidation and that’s without some unknown unseens popping out of a global economy to make things even worse.

Ah, the election! When we were only discussing one hard figure, the £6b in year cuts. It does look like an increasingly dishonest election campaign across the board now. Tories and Lib Dems will say that was Alistair Darling’s fault – he should have laid out fuller spending plans and then everyone else would’ve had to step up to the plate and be clearer about their plans. But on any audit, the level of information shared with the electorate of the pain ahead was puny. Well, now we know.