Budget 2014: experts respond

Green shoots? Dominic Lipinski/PA

Chancellor George Osborne has unveiled his fourth budget. The blueprint for recovery includes wholesale changes to pensions and savings, attempts to boost business investment, new relief for the costs of childcare, £140m for repairing the damage from the winter’s floods, a £119 billion cap on welfare – as well as a brand new design for the £1 coin.

As the day develops, our panel of experts here give their take on what this budget means for the economy, healthcare, education, the environment and, of course, ordinary members of the public.


Economy

John Van Reenen, Professor of Economics, London School of Economics

George Osborne boasted of the Britain’s economic strength with raised growth forecast of 2.7% this year. But the budget small print admits that this growth only gets national income up where it was in 2008. Under the Chancellor we have suffered the worst squeeze on wages and the slowest recovery for over a century. The government made a huge policy error by accelerating austerity four years ago. Slashing public investment when output was depressed derailed the recovery – it is still a third lower than before the crisis.

Measures on housing policy create a feel-good factor for homeowners that might help boost the Tory vote, but it puts the taxpayer on the hook for huge debts in the decades to come. And Budget benefits to pensioners are good for grabbing the grey vote, but they have been relatively shielded from the turmoil of the last 5 years. The increases in personal allowances are welcome, though the main beneficiaries will not be the very poor. The budget has some tinkering with taxes to stimulate investment in a desperate attempt to deal with the fact that business investment remains depressed. But the cause is again Osborne-omics: the slashing of government investment, depressed demand due to austerity and the failure to sort out the banks.

For decent growth, jobs and pay, we deserve much better than this.

Chris Martin, Professor of Economics, University of Bath

There is a looming fiscal dilemma. Further cuts to expenditure have been announced but will only kick in after the next general election, due next spring. Should these cuts be implemented? Not doing so would damage the credibility of fiscal plans, something that has been slowly rebuilt since the 2008 financial crisis led to an unprecedented increase in the deficit. But doing so is arguably more risky.

Welfare cuts have proved popular but have not saved significant amounts of money. Significant reductions in the welfare bill would require cutting benefits for older people, something that is extremely difficult politically. Reducing expenditure on health and education would also be difficult. These are major components of public expenditure so a ring fence implies that large cuts in other areas, already the focus of austerity, would be necessary to generate even modest reductions in overall expenditure. The likelihood is, then, that planned cuts will be watered down. That is the sensible choice.

Jo Blanden, Senior Lecturer in Economics and Deputy Head of School, University of Surrey

The BBC has summarised today’s budget as about “pensions, savings and bingo” and indeed there does seem to be a strong focus on the older generation. Politically this makes sense for the Conservatives as older, wealthier groups are more likely to consider voting Tory. But economically the group which has lost out most in the aftermath of the recession is the young with 20 percent unemployment among the 18-24 year olds and average earnings reduced by 8% for those in their 20s.

Ironically intergenerational inequalities were eloquently identified by Conservative Minister David Willets even before the recession started in his well-received book The Pinch. The new pension arrangements are set to net the Treasury a tidy sum, the hope is it will spend it on programmes to ease the squeeze on Generation Y.

Kenneth Gibb, Professor of Housing Economics, Glasgow University

The Chancellor predicts that housing supply initiatives announced today will over their lifetime increase completions by 200,000, three-fifths of which is down to the extension to 2020 of Help to Buy 1 equity loans for new build. Other measures include support for small and medium sized builders and repayable loans to help partnerships redevelop urban housing estates (particularly in the overheated South East), The general immediate view is that much of this is welcome and is a start on substantially expanding supply but is dwarfed by the scale of the challenge (i.e. we need to build about 250,000 units a year to match demand). We will need more Garden Cities (and these are policies with a long pay back period) and far more policies to free up land and encourage new supply.

Business

Dr Richard Fairchild, School of Management, University of Bath

I am delighted that this budget makes progress towards promoting business innovation, entrepreneurship, and business growth. The government has announced a series of measures, including reductions in energy costs, designed to encourage business investment and exports.

The budget sets out a commitment to improving business access to finance, and to further improve the integrity and competitiveness of the banking system. The Seed Enterprise Investment Scheme will play a key role in financing innovation. I am particularly impressed with the discussion of fairness in society, and the encouragement to investors to put their money into social enterprises. Measures that shift the culture in society towards fairness, trust, and empathy towards others are to be applauded. Overall, a very encouraging budget in terms of business growth.

Rob Hayward, Senior Lecturer, University of Brighton business school

The Chancellor has tried to address the lack of business investment with budget measures like the increase in the annual investment allowance to £500,000. This will cost the government £2 billion and will, argues Osborne, encourage an increase in the purchase of new plant and machinery by the private sector. If that is the case, it would help manufacturing and may even support the broader regional development of the economy.

However, a lack of business investment is not a UK phenomenon. The lacklustre nature of business investment in the US, which is at a more advanced stage of economic recovery from recession, raises some doubt about how effective Osborne’s policy will be.

Osborne really needs it to be successful if he is to capitalise on the signs of improvement in the economy. There is a limit to how much more household consumption can do.

Benefits

Karen Rowlingson, Director of the Centre on Household Assets and Savings Management, University of Birmingham

George Osborne has put a cap on the social security budget stating, in today’s budget, that we should never again allow the cost of welfare spending to “spiral out of control”. By so doing, he has perpetuated one of the many myths about spending on benefits. The reality is that the period 1995-2011 saw expenditure on benefits, as a proportion of GDP, falling sharply and then remaining stable for the longest period since the foundation of the welfare state.

Of course spending has increased since 2008/9 as a consequence of increasing levels of unemployment and underemployment but that is exactly why we have a social security safety net – to support people in times of need. The various caps to social security introduced in this, and previous, budgets, will merely serve to tear this safety net away and leave people vulnerable to severe levels of deprivation.

Michael Kitson, University Lecturer in Global Macroeconomics at University of Cambridge.

A negative economic shock (say, another world economic crisis) tends to increase the welfare bill – if a cap is imposed, those on welfare will individually see their benefits fall. And the inequity is that a policy of monetary easing to deal with a crisis pushes up asset prices which makes the rich – those owning assets – even richer.

This is a budget that tinkers with the price mechanism by manipulating taxes but does not address the system failures of the economy.

Scotland

David McCausland, Senior Lecturer in Economics at University of Aberdeen

With Scotland ageing more rapidly than the UK as a whole, the savings reforms will disproportionately benefit the population here. The changes will certainly be of symbolic importance to savers who have had their savings eroded through inflation over the last few years.

For people who are higher-rate taxpayers, the ISAs will mean that they are not losing 40% of their savings in tax. It ameliorates to some degree the lower interest rates on savings.

But one has to question whether it is right to extend the measures to stimulate the housing market. That kind of policy would tend to favour areas around London, which are already showing signs of over-heting, which threatens to further imbalance the economy. Increasing house prices are not going to make people feel better off, and risk repeating the mistakes of the past of a consumption and housing market-led boom. I would have thought they would want to focus on policies to tackle the erosion of real incomes and to stimulate investment in the economy.

Tax

Prem Sikka, Professor of Accounting, University of Essex

The chancellor’s focus on tax avoidance is welcome but still a long way off the mark. It would be interesting to see the details of how this extra £4 billion from curtailment of tax avoidance schemes is calculated. The previous estimates of the amounts to be recovered from money stashed away in Swiss banks have been spectacularly wrong. Even if the UK hits the £4 billion target, there are still billions more lost through avoidance schemes.

The claim that there is decline in tax avoidance because of the reduction in the number of schemes filed under the Disclosure of Tax Avoidance Schemes (DOTAS) legislation is not quite right. Because of the public opprobrium associated with tax avoidance, accounting firms now market “Financial Restructuring Plans” rather than tax avoidance schemes. The schemes can be marketed from places such as Luxembourg or Liechtenstein and thus escape UK laws.

Those who have signed up to tax avoidance schemes will have to pay tax up front; this is a good idea. But companies can easily shift profits to low/no tax jurisdictions through spurious royalty programmers and management fees, so the net effect of this legislation will be very small if any. There is no action on transfer pricing, the biggest device for shifting profits.

Childcare

Naomi Eisendstadt, Honorary Research Fellow, University of Oxford

It is encouraging that all three major parties are anxious to deal with the crisis in the price parents pay for childcare. Female participation in the labour market is good for the economy, and, if paid decent wages, good for the reduction of child poverty. The argument goes that a significant cause of in work poverty for families with children is the high price parents pay for childcare, so new subsidies are indeed welcome. But as always, the detail is important.

As the IPPR says, a subsidy via tax breaks is regressive, in that the higher paid tax payers get more benefit. A subsidy available for parents earning up to £300,000 per year cannot be seen as the best way to spend scarce resources. More importantly, it is yet again a demand side, rather than a supply side subsidy. We have seen a history of demand side subsidies that result in increasing the prices charged to parents rather than reducing costs. A better strategy would be a supply side subsidy to providers of childcare, conditional on improved training and wages for childcare staff.

Childcare is a notoriously low wage sector, with significant numbers of staff with little or no training. The subsidies announced at this stage seem to do nothing to address the need to improve the quality of childcare, nor the training, pay and conditions of childcare staff.

Technology

Suzy Moat, Assistant Professor of Behavioural Science, University of Warwick

It’s excellent to see that the government has recognised the huge economic value to be extracted from big data if the right investments are made. We all make decisions based on what we think is happening in the world right now, and what we believe will happen in the future.

Previously, measurements of human behaviour largely relied on experiments or surveys. In our technology dependent world, nearly everything we do now generates behavioural data, from our shopping, to our travel, to our energy consumption. If we can learn to exploit this data to gain faster, cheaper and larger scale measurements of the world around us, and identify behavioural patterns which repeat to build better forecasts of what’s to come, we can improve the decisions we make about resource distribution and much more.

Health

John Appleby, Visiting Professor in Economics at City University and Chief Economist at the King’s Fund

The main message from the Budget is that austerity grinds on. The NHS next year will be at a cliff edge financially. A regular survey we carry out at the Kings Fund of NHS finance directors shows they are very pessimistic about making ends meet in 2015-16.

In the end we get the health service we pay for. If NHS funding is frozen for the next parliament as the chancellor hinted, then health spending is going to fall as a proportion of GDP to just over 6% by 2021 from a high in 2009 of 8%. This would erode nearly all the increase since 2003 and is a big drop in the share of our wealth that we’re spending on health.

Across all government spending, it was 42.5% in 2014-15 and in 2018-19 the OBR forecast it will be 37.8%. The nearly five percentage point drop in total government spending is a very big fall – to one of the lowest levels in half a century – and will be reflected in continuing cuts in local government and other areas of government spending.

Arts

Eleonora Belfiore, Associate Professor of Cultural Policy at University of Warwick

As predicted, there aren’t many surprises for the arts. The government confirms its declared commitment to the creative industries with the extension of the tax relief currently enjoyed by film to theatre. The measure, amply discussed over the past months, is most likely to benefit commercial theatre companies wanting to tour their productions to the regions. It will be interesting to see how this measure will be perceived in the context of the policy maelstrom over the imbalance of public cultural investment between London and regions.

The perhaps unexpected injection of money for the restoration of cathedrals confirms the traditional predilection of Conservative governments for investing in heritage, though it’s probably more a function of the World War I commemorations than the sign of any strategic new focus on heritage.

The truth of the matter is that the fate of the arts is not to be fathomed by interpreting the few paltry mentions they get in the budget. Far more crucial will be to understand the implications of the budget for local government and how they will react to the cuts in store for them.

Science

Richard Jones, Pro-Vice-Chancellor for Research and Innovation at University of Sheffield

After a long period in which the industrial policy of successive British governments was not to have an industrial policy, we are once again seeing sector strategies being developed and some technologies being identified as priorities. Graphene, cell technology, and quantum information technologies have been singled out as areas in which world-leading research supported by our research councils should be purposefully translated into new products and new businesses.

These are welcome signs that some of these problems are being recognised in government. But the issue that faces us now is whether the scale of the remedies matches the scale of our problems, or indeed the scale of the opportunities that new technologies could offer. Our chronic and continuing underperformance in research and development – particularly at the strategic and business supported end – suggests that they don’t.

Environment

Neil Carter, Professor of Politics, University of York

It’s not a good budget for the environment. All green businesses will of course benefit from the broad range of incentives the chancellor has provided for business in general, but the decision to freeze the carbon price floor destroys the certainty in the energy market that businesses need in order to invest in energy efficiency and green technology measures – and prolongs the life of dirty coal-fired power stations.

It is a shame that efforts to improve the competitiveness of energy intensive smoke-stack industries have to come at the cost of reducing green regulations and levies. On the positive side, money is being spent on repairing flood defences, though it’s not clear yet whether there will be any to build new ones. The confirmation of a new garden city at Ebbsfleet could be interesting if it’s based on good environmental criteria.

But Osborne could have done much more. It’s a shame that the Green Investment Bank wasn’t given the right to raise money on the market, thereby missing an opportunity to channel new investment opportunities into the green sector. He could have boosted the ailing Green Deal. And if he wanted to show he hadn’t completely forgotten about the environment, he could have abandoned this year’s review of the fourth carbon budget, which environmentalists fear could result in a dilution of the UK’s carbon reduction commitments.


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