Oooh, I do love a good budget. It's an opportunity to poke fun at all the nonsensical misunderstandings of economics that politicians are prey to. Even if someone proposes something sensible you can be sure that the opposition to it will be rooted in a misconception of reality. So, what does this budget have for us today? …
...but it's a coalition budget, not a torry budget.
Don't be silly.
Sarah - I'm shocked at you!
I thought the Register-approved response to people like "RegisterFail" was "ODFO"?
I know, I hate it when people don't say the same thing every time.
christ on a bike, I've never seen a knee jerk so quickly!
I'm so far left I make ghandi look like a Tory, and even I can tell the difference between an authoritarian philosophy with the likes of Fox "News" and this article here which is much more Conservative/libertarian (Not by whole fields, but certainly enough).
Although I scoffed at the idea that reducing tax on foreign corperate profits was economically logical. But I'd know better to beat the drum without some data.
I constantly wonder if some people are reading a different site, then commenting here by mistake. El Reg is not right wing, not even close. I fact, it is fairly central overall. You presumably think that questioning Labour's illiberal policies on privacy, and a healthy questioning of AGW makes someone/thing automatically right wing.
If you don't like it, go somewhere else.
The Reg is not right-wing. You are a berk.
I feared the worse
That is I feared the worst when an El Reg ventured on this subject, but I'm pleasantly surprised. A good summary,
Incidentally, I did leave a comment against the Guardian's comment column yesterday to the effect that the those quoting Keynes in favour of keeping government expenditure were not evident when Gordon Brown and Alastair Darling were running increasing large deficits at a time when they should have been in surplus. The Guardian was also promoting the use of "moderate" inflation to reduce the real value of government debt which, of course, is simply a type of default and a grab from people's savings.
As far as freezes on public sector pay is concerned (one assume that includes MPs), then if that didn't happen there would be an even larger reduction in public sector employment than there would otherwise be. One of the reasons that unemployment hasn't become worse than it has in the private sector is exactly because of this sort of wage restraint.
As for the bankers. Well many are culpable, but it was the policies of many western governments (not just the UK's) which created a climate of cheap credit and over-extension of both private and public debt.. As sure as night follows day a credit crunch will arrive to bring it all crashing down once over-inflated assets and are used as collateral for increased borrowing.
Worse to come?
Certainly the running deficit going in to the Banking collapse has placed the country in a bad spot to be pulling our economy back on its feet, that over-managed, mismanaged, and double-speaking government will not be missed. With the out going government in mind (and the poor egangment with the deficit during the election) it was a relief to finally get the real picture as to how we are going to tackle an unprecedented level of debt.
That said the Banking and finance sectors got away with murder.
Yes, governments and regulators could and should have done something, but the post-war consensus was and remains the same that the public sector is better kept away from the markets. The budget makes a 2 billion a year provision, but it'll be a long time before 2 billion totals enough to even underwrite one bank let alone banks. A banker touting the current levy is like an lord of old being able to pay of a peasant's family after killing the father while stampeding through the family's home after a fox, except of course bankers are getting it for cheap.
Stretching the fox hunting lord metaphor a bit further and I find that there no laws to stop wild riding and similarly there are no changes in law or regulation to curtail the behavior of banks and the market. Plans were floating around to tax actual transactions (though not as the Robin Hood brigade would have it), a fractional tax to act as a dampener on the market tendency to pump out products (i.e., mortgage derivatives, as was) and dissuade commodity market predators from engineering destabilising price hikes. Granted you'd need to move such a plan internationally, but that little disincentivising skim would have helped bolster the emaciated 2 billion as well as actual change the culture that, as said, remains unchanged and would at least show the banking sector was willing to tighten their belts with everyone else they dropped in it.
Re:Worse to come
"That said the Banking and finance sectors got away with murder."
Given the size of the UK finance sector and the desire to get out of this mess at some point it's probably best not to shoot the goose that laid the golden egg even if it did shit on the dinner table afterwards.
An IT news site hasn't heard of Issuu ?
Tim is not an IT person. He's a metal person. Specifically Scandium
Just to try out an idea...
Why not scrap taxation altogether and simply agree that the government will print a certain amount of money each year for government expenses? Just think - no more tax returns, no more money spent on policing taxation, no more slipping through the cracks with tax free dividend & CGT income, no more low income traps, easily predictable inflation, ...
It seems like such a good idea that we'd already be doing it if there wasn't some disastrous downside. So what *is* the downside?
I'm no expert, but at a guess
The easily predicatble inflation would be easily predictably huge. That's great if your pay is going up relative to inflation, but savings would be diminishing rapidly, encouraging no-one to save. No-one would lend with anything other than at massive interest rates, as otherwise the money back would be worthless. I believe Mugabe is a fan of your philosophy, but it really hasn't turned out so well over there.
Then again, as said - I'm no expert. Just can't see that level of inflation being workable.
Which is a bad idea
The downside to the govt printing all the money it needs is that if gov't expenditure is~40% of GDP, the amount of money in circulation increases by more than 40% (more because the other 60% of GDPs worth of money is recycled, and spent more than once, imagine you spending your pay packet in a pub, the money ends up in a brewers pay packet later on).
That give you easily predictable, insanely high levels of inflation. I'd anticipate higher than Rhodesia, and certainly more than 100% per year. Also, as the money supply is growing so fast, returns on savings will be negligible, so savers will get nothing in the way of interest on their savings, so the elderly etc will be disadvantaged.
So, is that enough of a downside?
Hyper-Inflation is the downside
When you print money, there's more money in the system, and therefore the value of that money goes down.
So printing lots of money causes lots of inflation.
Print too much, and you get Zimbabwe, 1930's Germany etc. People being paid with a wheelbarrow full of notes and desperately trying to buy things that afternoon before it becomes worthless the next day.
Inflation is effectively the rate of reduction of the value of money.
All that said, Governments do create money all the time. They try to hide it, but they do.
Your inflation would indeed be predictable - Weimar Republic predictable
The money supply would increased by £690 Billion a year (based on 2009 spending)!!
The downside is that the wealth that people have saved decreases. This is a particular issue for the rich, who find themselves automatically losing large chunks of money every month, but no-one really likes to see their nest-egg steadily vanishing. Besides, there's a high overlap between wealth and political power -- on both sides of the floor -- so it's never going to happen.
Three major deciduous forests buying one ship’s peanut
May I refer you to the works of Douglas Adams, in particular the bit where the Golgafrinchans adopt leaves as legal tender...
The problem with printing money
is that the bits of paper (bits of cheap metal; numbers on a computer) have no value in themselves. Their value is in what they represent, which is a portion of the issuer's wealth. Dumping more money into circulation without an increase in real wealth simply spreads the wealth more thinly across the increased number of notes. No actual wealth is generated and everyone with existing money finds what they have on them is suddenly worth a good deal less in real spending power.
See any number of collapsing Northern European or African nations from the last two decades for a demo of where this leads.
Governments do print money - large amounts. Once upon a time, the amount of money printed was based upon the amount of gold / silver / other precious metals / jewels etc. That was done away with quite a while back.
Essentially, the amount of physical money (or even electronic money) in use is just a representation - and it doesn't match the actual value of assets held. It could be argued that it is a representation of the ability of the country to produce tradeable products or services, but it is a bit more complex than that.
As for the downside of printing extra money - I would refer you to the Weimar Republic or Zimbabwe. It's called hyperinflation and you wake up tomorrow and a loaf of bread is £10,000,000 - and then by lunch time, it has doubled in price.
A thought experiment with your big idea...
Think about it - if the UK government printed £400bn to pay the bills this year and they did so for five years running that's an extra £2 trillion that will be pumped into the economy. In ten years it's an extra £4 trillion. Just print money each year and it accumulates - to put this in perspective, the UK GDP is less than £1.5 trillion. That money won't just sit there - people will try and spend it. The problem is that there is only a limited amount of goods and services any economy can produce at a given time and the results is inflation - lots of it, so the government would either have to print more and more of it and you get Zimbabwe/Weimar Republic/name-your-own-banana-republic hyperinflation. The currency becomes even more worthless beyond the country's borders (who is going to take it when the government will print even more the next year). If you don't print more and more money and print the same fixed amount every year then you still get inflation, albeit not as much, but the government would get less for its fixed amount of money and be unable to pay its bills in full which would get worse year by year.
In fact you can view this hyper inflation as an aggressive tax whereby the government rapidly wipes out the value of your cash savings in order for them to be able to buy services and goods as only they can print more money at ever larger denominations.
In fact there has been some "printing" of money going on in the UK (called quantitative easing) with the Bank of England buying government bonds with money it doesn't really have (although that's about putting liquidity into the banking systems and not paying government bills - although it as the useful effect of keeping the interest rates that have to be paid by the government on gilts lower than it might otherwise be). The penalty of this, if these are not resold onto the market at some later point is inflation as more money washes around the economy. During the 1970s a lot of western governments learnt the hard way about the inflationary effects of the money supply running out of control.
(nb. it is normal for there to be some growth in the money supply as economies expand - it's when it gets excessive that it causes big problems).
So what *is* the downside?
An inflation rate of 40% a year is a massive drag on growth, no matter how predictable it is. Plus, you've just eliminated *the* major demand for £s on a day to day basis: the necessity of collecting enough of them to pay your taxes. In your scenario I'd expect the private sector to go underground as much as possible & move to some other medium of exchange.
What might be sensible is to stop bothering with the ludicrous idea that the government should borrow money at interest in order to fund a short term deficit: there's a decent case to be made that deficit spending *should* simply be printed.
I'm sure that there will be endless raging and to-and-froing in the comments here, but I'd just like to say thanks for an interesting insight in the budget.
Whether we would care to admit it or not (and I suspect most here won't), the intricacies of the budget are over the heads of those of us that don't study it for a living. So thank you for simplifying it for this pleb.
A good article but a complete picture?
The coalition have been accused today of trying to solve the problem too quickly and also of not going after the banks more harshly. And for ideological reasons (the lib dems lost the argument.)
There is a sum of cash missing. Get it from the banks who can be you're friend or from the poor and the middle classes who don't have a voice?
A reduction of 25% in public services is going reduce the ability of the poor and the middle class to spend. Not to mention the damage it is going to do to front line services. That damage could have been mitigated if the reduction were 20% and the cash regained over a longer period.
Pain for three years then some good news and then an election... The Tories are working within a window of opportunity rather then looking at the long term potential to solve the problem.
Conspiracy: did this article come up short for a reason?
From another planet?
If you take a look at the insane spending on bloated, worhless, ill-conceived projects in Government IT ALONE you'd know that the cuts can be made without a reduction of frontline services. If services do suffer it'll be as result of department budget holders bringing their axes down in the wrong places.
The cuts are already happening
The cuts are already happening. A lot of FUD surrounding the crisis has already befuddled some managers. A youth centre closing allowing the kids to seek other opportunities in the neighbourhood and poor management leading to the break up of a team doing GoodWork in my organisation.
"If services do suffer it'll be as result of department budget holders bringing their axes down in the wrong places."
How much faith do you have in your managers?
"for starters you might want to look at the articles assertion that increase capital gains tax equates to decreased tax revenue- this is far from proven"
So increased taxation doesn't lead to increased tax avoidance? Think you might want to go and do some research yourself. Maybe you'd be happy working until Wednesday afternoon or perhaps even Thursday for the Government but I doubt the rest of us would (from a tax perspective not employer)
Stop being a dunce
"If you don't understand something, you should probably consider learning about it properly if you intend to base any kind of viewpoint on it"
I think it's reasonably obvious that no-one can be an expert at everything in their life. I'd like to develop a viewpoint on molecular biology, but I don't know enough about it so I defer to an expert in the matter.
The trick, as with anything in life, is to read varied opinions from people who know what they're talking about, then work out which one makes more sense to you. No, it isn't perfect, but if you spent your entire life researching decisions you'd never make any. The other trick to life is not wasting your time registering a message board account called 'RegisterFail', for two reasons:
1) If you don't like the site, why come here? Why waste your time on such a negative activity? Go outside, smell the fresh air, etc.
2) The whole 'fail' meme has already gone on far too long, and stopped being fun long before that. If you wanted to keep in with theme of the site you could have at last called yourself 'Regtard'.
...is the issue here and people in Europe should face it or learn Greek. And then Chinese, because that will be the major remaining labour market for ten years after an actual default.
We have to get the arse out of the mud NOW and have balanced budgets. If we can't make it this year, we cannot make it until we have a nice little Sovereign Default.
Capital Gains Tax
Thanks to Tim Worstall for declaring his interest by confessing to being part of the Adam Smith Institute. The most uncontentious adjective applicable to the ASI is "Thatcherite", with their slavish belief in total privatisation, a flat rate tax and a state as small as possible.
If you look at the cited table it does NOT show a reduction in CGT income for "a decade and a half".
Why the hell should someone who makes their money from capital or who has liquid capital pay less tax than me or anyone who makes their living from their labour?!
One of the reasons why CGT income may drop if the rate is increased to Income Tax levels is that CGT is often an avoidance mechanism for those with capital, and if the taxation rates are equal we would see a drop in that mechanism; god forbid the effect on growth if directors paid themselves a simple salary.
Anyone with 3 years liquid capital and a flexibility with how one is paid (think rich beggars and directors of other people's companies) could effectively take some of their income as a capital investment (shares? share options?) and invest it in a 3 year buffer. 3 years later they take the capital gain on the investment as their income and reinvest some more for 3 years. This gives them a tax threshold and a much lower rate.
A lower rate CGT is basically saying that £1000 made from investing capital is worth more than £1000 earnt from your labour.
It is shameful that Blair/Brown spent 13 years pandering after Daily Mail readers rather than Labour's principals.
...with the whole CGT argument, as I see it, is that CGT sort of covers two rather different groups of people.
On the one hand, you have Mr Moneybags with oodles of cold hard cash that they can drop into some convenient investment vehicle and then draw down at a later date taking advantage of CGT rates rather than income tax. These are the people to whom I believe you are referring - and they are the people to whom _everyone_ refers when bemoaning the inherent, unfair naughtiness of CGT.
However, on the other hand, you have a large (in fact, very large) number of small business owners and family firms. Many of whom have invested all of their spare cash (and more) in their businesses. Cash which, in many cases, has already been taxed at income tax rates, since it originates in the savings that the small business owner managed to scrape together while working in a previous "normal" job. These small business owners get relatively little financial return in the short term - the creditors, the tax man, the staff, the bank, Hell, just about _everybody_ gets paid before the owner does (in general and if you're running your business in a legitimate manner).
Other than the satisfaction of being your own boss (which can be great at times but negligible at others), there's not a lot to look forward to. Well, except for the day when you can grow the business to the point where you _either_ pay yourself a huge salary just for sitting on your yacht all day _or_ sell it for a profit and recoup all the money, time and work that you've put in over the years. But if everyone decides that, after all that time and effort and paying corporation taxes and bank interest and putting in their own money (that had already been taxed) and what-have-you, then you're going to tax the bejeesus out of whatever they do manage to make out of the whole game, well, they might as well just say "Sod you!", sack all the staff, shut up shop and get out with whatever they can before signing on the dole (not that they'll now be eligible for any benefits of course, regardless of whether they've got any money or not, but it's the thought that counts).
So there's the problem you see? Of course, the Entrepreneur's lifetime relief allowance does cover this situation to a large extent (thankfully), so no-one needs to be too worried about it at the moment. However, I think it would be better if the two different capital investment situations were treated in a more separate and distinct manner (since who is to say that the Entrepreneur's relief idea won't just evaporate in some future budget, leaving people to face whatever CGT regime and rates happen to be current at that time).
Answers on a postcard please?
Because it's not all about you
"Why the hell should someone who makes their money from capital or who has liquid capital pay less tax than me or anyone who makes their living from their labour?!"
It's about what's best for the economy as a whole. Something which I think this article covered very well.
You see this is the problem with left-wing envy-politics. The desire to chase down those rich bastards and squeeze them for every cent. Rich people avoid tax because they can. They have expensive lawyers, accountants and tax consultants that make it so. Chase them all you like but you'll end up spending more on collection than you'll receive. This is one of the main arguments for flat-rate taxation as opposed to tiered levels with high top rates which inherently provide an incentive towards avoidance. Administration is also less costly.
Erm why not
Why not use the VAT leveraged from all the devices used to connect to this broadband, like the VAT on computers which is kinda ironic that a computer is deemed a luxury item and yet the the ability to have broadband is deemed a right [confused]. By using private money you expose the public to be ripped off and if its profitable then why dont the goverment have the basic infrastructure and lease usage to private companies to provide the end-user service. no monopol, assured QOS and any profit wiill be fed back into the infrastucture and worst case the country instead of the usual public company bullshit which is. 99% underpaid peons doing all the work and some red-cheeked muppet who sits there screwing the staff over so the balance sheet looks good so it can pay shareholders and generaly hype there company and drive the shareprice up, which means nothing beyond how well they screw over there suppliers and staff and there cunsumers at the end of the day - thats it in a nutshell.
"Tobias and Jocasta's second pony groom"
Seriously this does seem like a fairly reasoned budget. I would presume that Osborne would *not* have picked 28% at random when he had the whole Treasury modeling team to give him a clear picture of what would (and would not) work.
I also suspect the public sector freeze on people *above* £24k will seem pretty reasonable and diffuse any cries of "Unfair to the nurses/cleaners/porters etc".
It's impossible to say but I wonder if it would have been *so* reasonable and balanced *without* it being a coalition?
Well fork me.....
That was a coherent, rational, reasonable and fairly objective look at the budget. Thanks!
On another note, did you realise that you were writing for the Register? Did nobody fill you in that you are supposed to blame it all on the UK arms industry (because they are to blame for most things), crooked politicians or some other scapegoat?
I must also applaud you on managing to hide in a "free market think tank" with views like that. You are supposed to foam at the mouth and tell us that all state interference is evil and leads to communism which causes masturbation and child abuse which attracts illegal immigrants and damages property prices.
Oh, and congrats indeed on slipping "arbitrage intertemporal desires" into an article not in the economist ;-) (it's worth a quick Wiki read if you don't know what it is)
"Stick to the Daily Mail"-type comments
I agree it was common sense and not ideological.
It's only really bigoted Guardian readers who need to view classic liberal economics as "baby-eating Right Wingers", so they can avoid listening to the arguments.
The Lefties on the other hand have become a cult: State good, everything else bad.
He kinda did obey El reg rules
He did hint and indeed point towards this problem being 'Brown' and 'Darling.' Not corrupt just inept. Spending money during the good years on the millenium dome, ID cards, stupid patient summary care records, quangos etc. etc. Instead of saving and using it wisely.
Good article though.
The problem will be...
VAT going up another couple of percent, the continuing escalator and the upwardly fluctuating price of oil are going to be putting the price of petrol at the pump up past £1.30 pretty soon.
I think there will come a point where this presents a very serious problem for the british people and the government have to alleviate it somehow. I think a reaction like we saw in 2000 is to be expected...
The average motorist does somewhere around 14000 miles a year. Assuming an average car with, say, 40MPG fuel consumption, that translates (very approximately) to 1500 litres/year.
For the little-old-lady who just needs a car to go shopping, the figures are more likely 5000 miles @ 50MPG, so ~ 500 litres/year or less.
An extra 20p/litre is therefore going to cost between £100 and £300 more per year, or between £2 and £6 per week, which is largely insignificant in the overall cost of running a car (insurance, servicing, depreciation).
Fuel costs make a big difference to commercial users, and to the cost of goods shipped by road, but for private car users the pain is more imaginary than real. That is shown by the way that fuel sales drop sharply after a price rise, but rapidly return to previous levels.
Cost of petrol/diesel
The British people have had an alternative for the last 12 years to my knowledge, and probably longer. LPG is cheap and readily available, and the higher petrol goes, the shorter the payback period is.
Of course, it is only cheaper due to lower taxation, which *could* change overnight. But I've been hearing that for the last twelve years, and it hasn't happened yet, in any serious sense.
Cue lots of whining from people who could change, but won't....
Blame where it belongs
If blame is indeed to placed, I'd put it firmly on the shoulders of the so-called economic theorists. I don't believe we've had a truly ideologically-driven budget since the Blessed/Cursed Margaret (pick your preference).
Theorists are trying to come across all learned and knowing - trying to make it appear like a science. You know the scenario, the policy wonk states "A, B therefore C" and we all nod along knowingly.
It's never worked. Never. Yet we continue to pay respect (unearned at that) to these rarified and abstract views which exist only in the mind of the theorist and their XLS files.
So for a wonk to claim suppositions as fact, like this article, is a bit hard to swallow. Come back when there is a proven economic model with a real-world successful track record and try again.
re Marginal Deduction Rates
It's wrong to say that the increase in basic allowance will reduce the marginal deduction rate of people returning to work - according to the Treasury's figures changes to the tax credit taper mean that the opposite is true and more people will face a higher MDR (see p69 of the red book).
Also, recent IMF research would disagree with this articles justification for reducing corporation tax, with the paper at http://www.imf.org/external/pubs/ft/wp/2010/wp1073.pdf showing that a stimulus of government investment increased GDP by 9 times the amount of an identical stimulus used for reducing corporate taxes. One of their conclusions was "Temporary expansionary fiscal actions are most effective when the fiscal instrument is spending or well-targeted transfers".
This budget offers little stimulus for the growth we need.
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