… But if you look hard enough you will find the components of ‘debt’.
If you’re (a) in the UK and (b) not hiding under a rock, you will know that there was an emergency Budget yesterday, delivered by new Chancellor George Osborne. Now I’m not going to editorialise, politicise or analyse in any great detail here – I’ll leave that to the experts and spin doctors in the media – but here are some general thoughts in layman’s language.
(If you want a quick overview of Osborne’s Budget plans, this summary on the BBC website is as good a place as any to start.)
What’s the big deal?
Debt and deficit are the big problems facing the UK, despite the fact the economy grew (marginally) in the first quarter of the year.
In simple terms, the UK borrowed loads of money to support the economy during the recession, with the intention of paying it back over the longer-term via a combination of additional revenue from a growing economy and (possibly) spending cuts.
However, because the recovery has been slower than expected, the government is still spending money faster than it is bringing it in. Lower-than-expected growth deals the government coffers the twin blow of lower tax revenues and higher spending. There is less income tax because fewer people are in work, more benefits to pay out to a rising number of unemployed people, less consumer spending in general and so on. This all creates a spiral of decline which can be difficult to break.
The net result is a Budget deficit – not in itself a terrible thing – which, if left unchecked, will continue to widen. And it is here that the true danger lies. We have seen what happens when a country’s deficit gets out of control, which can be summed up in one word: Greece.
On a personal basis, it’s like you or I having a credit card. If you’re responsible about it, there’s nothing wrong with having an outstanding balance which isn’t paid off in full every month, as long as your income can cover the interest repayments. But when you reach the point where your card is maxed out, if you raise the limit on your card (i.e. increase your Budget deficit) and still cannot keep up with the repayments (i.e. your deficit keeps on growing out of control), then bankruptcy is the inevitable result (i.e. Greece). The only solution is to either increase your income (e.g. get a better-paid job) or reduce your spending (e.g. cancel that holiday in the Bahamas).
This is the dilemma facing the new government. Income is not increasing as quickly as hoped, because the economic recovery is much slower than expected: unemployment remains high and many of those with jobs are experiencing pay freezes, meaning less income tax revenue, and because consumer confidence is low, we are cautious about spending more, meaning less revenue from VAT and other forms of taxation.
Increased taxation is an obvious first step in attempting to balance the books, hence the rise in VAT. But it is also something of a high-wire act. Maximise income, yes, but not at the extent of discouraging businesses from investing in growth or consumers from spending – both of which could pitch the UK into renewed economic decline. How much is enough? How much is too much? Who knows?
Hence spending cuts are also critical. Waste in the public sector is already being targeted. (There is always waste – no large organisation is ever 100% efficient.) Discretionary projects which will not help the deficit in the medium-term will be canned. Belts will generally be tightened. To you and I, this will most directly affect us in terms of the freezing or reduction of, for instance, child and housing benefits. These are casualties of the war on debt. Osborne’s juggling act is to make a series of cuts which make a big enough difference in the Budget without excessively penalising any one section of society, in particular those whose need is the greatest.
I’m not saying Osborne has necessarily got it right. Nobody really knows for sure. The UK is subject to the ebb and flow of the global economy, as well as the fickle opinions of businesses and consumers. But the one thing which is abundantly clear to me is that sticking his head in the sand and doing nothing at all was not a viable option.
Everyone needs to contribute
The natural reaction to any Budget is typically “What’s in it for me?” This year, with the austerity message having been drummed into the public consciousness ever since last month’s general election, this has become “How much worse off am I going to be?”
The basic facts are these. Something has to be done about reducing the Budget deficit, which means raising more income and spending less. Although the detail behind it is extremely complex, the equation is really quite simple: we will all be worse off. Rich or poor, everyone has to contribute in some way.
There really is no such thing as a free lunch: for every new tax break or benefit which helps a proportion of the population, there has to be a cut or a tax increase which takes something away from another. The Chancellor giveth, and the Chancellor taketh away.
Some measures will affect everyone equally – or, at least, in proportion to their discretionary spend. The rise in VAT to 20% is a good example of this. Although that number makes many people flinch in horror, in reality it brings us into line with much of the rest of Europe, where VAT is typically between 18 and 20%: it is 19% in Germany, 19.6% in France, 20% in Italy and a whopping 25% across Scandinavia (actually, 25.5% in Iceland). So the choice for individuals is simple – either accept that VAT-rated goods will now cost 2.1% more from January (the net impact of a rise from 17.5% to 20%), or spend a bit less – but at least it is a choice. (It is also worth remembering that many basic goods such as domestic gas, children’s clothes and most food are either exempt from VAT or charged at a reduced rate.)
The overall consensus seems to be that ‘Middle England’ will be hardest hit by yesterday’s Budget. As it happens, I can live with that.
I certainly don’t believe in taxing the better-off simply “because they can afford it” in some romanticised Robin Hood-style view of the world. I’m in the 40% tax band – comfortable, but hardly rolling about in champagne and caviar – and I’ve worked bloody hard to ensure a good life for my family. Like everyone else, I complain about government waste, dodgy bankers, the amount of duty I pay every time I fill up my car, and everything else that goes with being part of a modern, civilised society. But I also understand that I have a social as well as personal responsibility: so I pay my taxes without (too much) complaint, I make monthly donations to four charities I have a personal interest in, and I’m not going to moan and whinge about the fact that this Budget will leave me a bit out of pocket every month, because I know it’s for the greater good.
Equally, I also believe in the economic value of social benefits – to a point. My mother-in-law and partner are both wheelchair-ridden and on full disability benefits which are enough for them to enjoy a comfortable but hardly extravagant lifestyle. They are not economically inactive out of choice or inclination, and there is no reason I can see why they and the hundreds of thousands of people who are in similar situations should not be entitled to a reasonable standard of living. The same goes for the short-term unemployed, or those who have been out of work for longer but perhaps lack the skills or support to apply for other types of jobs. Beyond that? There are people who need benefits, and there are those who benefit from benefits. I will say no more.
But I have always been slightly uncomfortable about the range and value of benefits available to the influential middle classes, particularly those which feel like vote-winning handouts. I’m really not so sure they classify as must-haves in times like these. And while I would of, course, regret losing those benefits that we still qualify for, as a family with combined earnings in the top 5% of UK households I do feel that we don’t really have a leg to stand on when it comes to complaining about our lot in life. Rather than increase the rate of income tax for higher earners, I would much rather lose benefits to an equivalent value – at least then I can rationalise it as being denied things I do not actually need, rather than being punished simply because I’m a bit better off than many others.
So, the long and the short of it is that I’m not that bothered by the Budget. I will let the government and the economists sort out the country’s monetary ills and accept that I will have to dip into my pocket a bit as my contribution to that.
In the meantime, I have far more important things to worry about – like football. Come on, England. Win today and all that personal selfishness about a few quid of tax will be quickly forgotten (for a few days at least).