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Michael Baxter

Bull and bear: an optimistic and pessimistic view of the budget

Written by: Michael Baxter on March 21st 2013

Category: Bull & Bear, News

Today, bull and bear is keeping a score card – awarding points for and against George Osborne’s latest plan for the economy. So the question is will it be a win, loss, or score draw?

Forever revising downwards

Actually, forever is a bit harsh. 2012 was actually better than the Office of Budget Responsibility (OBR) previously estimated. Back in December it projected growth of minus 0.1 per cent for last year, and now it is saying plus 0.2 per cent. That’s good, but alas the revisions for 2013 and 2014 went quite worryingly in the opposite direction.

At the end of last year the OBR predicted growth of 1.2 per cent this year, and now it is forecasting 0.6 per cent. Last year it forecast growth of 2.1 per cent in 2014, and now it is saying 1.8 per cent. Its forecasts – or is that guesses – for 2015, 2016 and 2017 are unchanged, at 2.3, 2.7 and 2.8 per cent respectively. But then again, let’s face it, what is the point of exchanging a guess for another guess?

As for inflation, it is now forecasting 2.8 per cent this year, followed by 2.4 then 2.1 per cent, but then – as if by magic – inflation in both 2016 and 2017 is expected to be 2.0 per cent, precisely on target.

As for public sector net borrowing, the story looks as follows:  5.6 per cent of GDP in the current financial year, followed by 6.8 per cent, then 5.9 per cent, then 5.0 then 3.4 and in 2017 to 2018 2.2 per cent. The OBR has revised its estimate for borrowing upwards for every year from 2012 to 2013 onwards. And in some years – for example in 2015 to 2016, for which public sector net borrowing was revised upwards from 4.1 to 5.0 per cent of GDP – quite dramatically so.

Public sector net debt, is expected to be 75.9 per cent of GDP this year, 79.2 per cent next, followed by 82.6 per cent, then 85.1 per cent, 85.6 per cent, and then in 2017 to 2018 84.8 per cent.

Of course the key is GDP. If GDP can rise at a faster rate, net debt to GDP will fall; if it is worse than expected, then net debt will exceed projections.

The latest projections suggest net debt will be 7.5 percentage points higher in 2017 to 2018 than in the previous projections published last December.

The thing that really stands out here is that the OBR has revised its projections really quite substantially from just a few months ago. That is worrying. How can its forecast made last December turn out to have been so wrong so soon?

As for the score card: let’s award one point against Osborne for falling GDP and another point against for rising public net debt. So that’s two nil against.

Osborne gives AIM a boost

“Many observers of the British tax system,” said our George, “Complain that it has long biased debt financing over equity investment.” He makes an interesting argument. Some say the reason why the dotcom crash did not lead to a major economic crisis was because the funding for dotcoms was based on equity. As we all know the credit bubble was, by definition, based on leverage and was followed by a very nasty crisis. The inference from this is that equity is good, while leverage is bad. That’s a little simplistic, but you get the point.

By abolishing stamp duty on shares traded on the AIM market, Mr Osborne is encouraging equity investment into smaller companies, and giving investors a nice incentive too.

This is a good move. Let’s award a point to the Chancellor.

So far then, the score is two one against George.

Corporation tax slashed to lowest among major economies in the developed world

One of George’s more interesting ideas was cutting corporation tax to 20 per cent in 2015. The Chancellor said corporate tax is: “The lowest business tax of any major economy in the world.”

Businesses like this idea; of course they do, why wouldn’t they?

The arguments for and against cutting corporation tax have been made here quite recently. In a nut shell, if companies are sitting on billions of pound of cash that they are not spending, how can ensuring that they have even more cash help? Profits’ share of GDP have been rising, wages falling, how can taxing profits less help that?

Of course, it will help to alleviate the problem of tax avoidance. But then if you follow that argument through, you might say why not go further, and deal with the problem of avoiding corporation tax by getting rid of the tax altogether.

In terms of helping the UK’s position with the rest of the world, the cut in corporate tax will help. But then so would a trade subsidy. We don’t like trade subsidies because that is protectionism. Cutting corporation tax, when globally we probably need it to rise, is really not that dissimilar to protectionism.

But because of the undoubted short term benefits to the UK in this tax, let’s call this a draw, say one all.

The overall score then is still two one against George.

MPC sees remit change, but only very slightly

There was much talk before the budget that the Bank of England’s MPC remit would be changed, perhaps by requiring it to target employment as well as inflation.

Well the remit has been changed, but not by much. Now the MPC can be more forward looking in tracking inflation, and has greater flexibility in using unconventional tools.

Sorry, this may seem like a cop out, but would like to reserve judgement on that. What is meant by using unconventional tools? If this means the MPC can use QE to buy bonds in banks which focus on funding investment, or bonds in infrastructure schemes, this may yet prove to be a master stroke.

Apologies again, but we are just going to have to wait and see.

Employers’ National Insurance cut

For every employer across the land, the first £2,000 of employers’ national insurance is being removed, altogether. George put it this way: “For a person who’s set up their own business, and is thinking about taking on their first employee, a huge barrier will be removed. They can hire someone on £22,000 or four people on the minimum wage, and pay no jobs tax.”

Apologies again – but this time for sounding as though I’m gushing. This was a good move – perhaps too small, but a good one nonetheless. One more point to George.

The score so far is two all.

Property market reforms

Today’s Thought for the Day (Chancellor reveals budget to create economic recovery, but will it be the right type of recovery? ) made the case for and against George’s efforts to create more home owners/get house prices booming.

The danger in his plan is that it will create a housing boom, which may indeed charge growth, but by creating a new housing bubble.

Perhaps one argument in defence of George should be pointed out here.

He is spending £3.5 billion on providing an interest free loan to home buyers who cannot raise a 25 per cent deposit. This may indeed create a housing boom, when what the UK really needs is more supply of new homes.

But then again, his scheme applies to new homes only. If it does lead to a rise in the number of new properties being built in the UK then George may have created both jobs, and dealt with one of the UK’s more pressing issues – under-supply of housing stock.

This fact alone saves the day for George, and perhaps he edges it with this change. Let’s say one nil.

The score now is three two to George.

Tax changes

I’m not sure that it is appropriate to get into reforms to taxation. Whether you agree or disagree depends on your politics, and may have little to do with economics. Should those on welfare be penalised, so that they are encouraged to find work, or is it the case that the work does not exist, and that by providing benefits, at least aggregate demand is propped up? It depends on your point of view.

A similar argument applies to reducing the tax on the very richest.

That said, this argument from Joe Wiggins, Founder and Director of Perfect Circle is interesting. He said: “As a Tory I despise the fact that we reduced the highest rate of tax from 50 to 45 per cent whilst at the same time capped increases in benefits by 1 per cent for the neediest in society.”

As for the argument about Keynesian stimulus and/or austerity, this also boils down to your point of view. Since the economic profession can’t make up its mind on this point, it should perhaps be left to each and everyone one of us to form our own views on this.

What the budget has not done?

But in failing to give entrepreneurs the kind of support this column has been calling for, the Chancellor did miss a trick – a big trick. And for that, let’s deduct a point.

That takes the overall score to three all.

Do you agree, or disagree?


And finally there is news that the cost of beer is being reduced by a penny a pint. Some media reports say this is, in fact, illegal.

Bull and bear don’t care. Bull is off to the pub to celebrate the thought of cheaper beer, and bear is drowning his sorrows.


These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: AIM stamp duty, budget corporation tax, Employers’ National Insurance budget, mortgage guarantee, MPC remit, OBR forecasts 2013

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