Leading analysts say Budget is risky as well regressive

By staff writers
June 24, 2010

The UK coalition government has been left on the back foot in defending its emergency budget after established analysts proclaimed its social impact regressive and its economic approach flawed.

Dr Richard C. Koo, the Chief Economist of Nomura Research Institute, the research arm of the leading securities house in Japan, said last night that Chancellor George Osborne's budget was "very poorly timed" given developments in Europe and the private sector, while the respected and independent Institute for Fiscal Studies (IFS) proclaimed it regressive, with the very lowest-income 10 per cent hit relatively hard.

The BBC Newsnight programme's analyis of the Office of Budget Responsibility’s published economic assumptions, upon which official public finance forecasts are based, suggested that the success of the government's strategy was relying on a massive - most would say implausible - turnaround from net importing to net substantial export growth in around three years. This contradicts the experience in Canada and elsewhere, which the Coalition has been claiming as a precedent.

The attack on public spending would reverse the public sector contribution to the growth needed to pay off structural debt and sustain the economy, and with falling consumer demand, the strain would need to be taken by a significant expansion in private sector investment, exports and housing.

But Dr Koo, a macro-economic specialist, suggested that this was a doomed hope because the government was "pulling the plug" precisely at a time when the private sector is de-leveraging, in spite of low interest rates. The result, he said, was that the British economy could tailspin, as it did in Japan in the 1990s - the much-feared 'double-dip recession', which the globally-recognised Nomura analyst started warning about in November 2009.

Dr Koo said that his own country had taken many years to recover from parallel deep cuts in 1997, and had only done so through fiscal stimulus, which had been successful despite the pressure of global recession. He also contradicted the Chancellor's and the government's claim that their strategy was "unavoidable", declaring: "If it was unavoidable, bond prices would not be so high and yield so low."

Meanwhile, the deputy prime minister, Nick Clegg, whose Liberal Democrats are now presiding over the very "Tory tax bombshell" VAT increase they campaigned against and claimed votes for opposing, found himself on the back foot on BBC Radio 4's 'Today' programme this morning, when he was confronted with the IFS's analysis that the budget was "somewhat regressive – when you take out the effect of measures that were inherited from the previous Government, when you look further into the future than 2012–13 and when you include some other measures that the Treasury has chosen not to model."

Mr Clegg did not deny that he had shifted to the centre-right, though he continued to proclaim himself "a liberal to my fingertips". However, the notion of a "progressive budget" has been thoroughly undermined by independent economists, not least the IFS.

The Institute for Fiscal Studies points out that the Red Book's formal distributional analysis of the impact of tax and benefit spending measures shows that the very lowest-income 10 per cent are hit hard, and that the most important omission in the government's attempt to defend regressive VAT rises in terms of spending rather than household income, is the impact of looming cuts to public services, which are likely to hit poorer households significantly harder than richer ones.

The IFS describes the government's measures as presaging "the longest, deepest sustained period of cuts to public services spending at least since World War II" and its director, Robert Chote, added that "[w]hen Mr Osborne said that 'the years of debt and spending' made the £13 billion increase in VAT unavoidable, you might just as well say it was his desire to cut other taxes that made it so."

The Institute also said that from a business perspective the Chancellor had "missed an opportunity to move to a more coherent treatment of saving in the tax system", that "the cuts in the small profits rate and the generosity of capital allowances are less welcome... [t]his is not a simplification." It declared the National Insurance break for start-ups "complicated, potentially prone to avoidance and oddly targeted."

The IFS also points out that the 80:20 split between public spending cuts and tax take contrasts with the 50:50 ratio under even Thatcherite chancellors like Norman Lamont in 1993.

Such judgments from sources defined as 'orthodox' rather than revisionary substantially undermines the attempt of the new government to claim that critics of its economic modelling and the unfairness of its budget's impact are simply siren voices on the liberal left.

Civil society, anti-poverty and church groups have also attacked the 22 June statement's assault on vulnerable groups, including the unemployed (with benefit reductions hitting the jobless hard at a time when there are five job-seekers for every available vacancy), those in housing need, children and old people in lower income households, and people with disabilities.

Mr Clegg tried to dismiss the Institute for Fiscal Studies analysis in interviews this morning, and denies that there are splits within his Liberal Democrat party over the cuts. He said that it would have been "morally wrong" not to undertake fiscal consolidation.

But critics say that the choice to cut is primarily a political one that the Conservatives have pulled their Lib-Dem partners into sanctioning, and economist Ann Pettifor, who predicted an Anglo-American debt-deflationary crisis back in 2003, together with Victoria Chick, Emeritus Professor of Economics at University College, London, have produced a paper on the evidence that fiscal consolidation increases, rather than ’slashes’ debt.

Environmentally-oriented economists argue that the cuts are reactionary as well as recessionary, and that a 'Green New Deal' based on substantial investment and restructuring towards a zero-carbon future lies at the heart of the range of alternative policies that the three main parties are ignoring.


Read the full IFS analysis here: http://www.ifs.org.uk/projects/330

Ann Pettifor and Victoria Chick's paper on the recessionary impact of fiscal consolidation (*.PDF Adobe Acrobat format): http://www.debtonation.org/wp-content/uploads/2010/06/Fiscal-Consolidati...

Macro-economic expert Richard Koo on a 'double dip' recession: http://tinyurl.com/3ayvltl


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