Friday, 18 March 2016

Budget Time

Let's talk a little about British politics for a change.  The BBC decided the headline for their story on the new budget would be about the surprise inclusion of a "sugar tax" on soft drinks.  In a clear example of its left-wing bias, news that welfare spending would have to be cut to reduce deficits, but that there was certainly money to cut corporation tax and the top rate of capital gains, was buried in the middle of the article.

Of course, it's hard to judge what the impact of the budget will be on social inequality since last year the government decided to stop including that information.  But I'm sure there's no nefarious intent.  Why, neither Cameron nor Osborne has a mustache to twirl!  Plus, as the Hufington Post pointed out, cutting corporation tax is a major example of fixing inequality, allowing all companies to pay closer to what Google does.

On a more serious note, when the Tories first came into power, they set about reducing the deficit with cuts across the board, including the military, and even temporary tax increases.  Of course, they had the "moderation" of the Lib Dem coalition.  But also, when the economy remained sluggish after the first couple of years in office, Osbourne engaged in a more expansionary financial policy with quantitative easing.  And, surprise surprise, the economy actually improved.

Cutting the deficit is one of those things that sounds like an automatic good, which is why politicians who manage it like to boast about it.  But this is largely based on intuition from individual finances, while governments are a different beast.  Especially for stable developed nations like the UK, there is a guaranteed source of income in taxes, while most individuals must worry about losing their job.  Plus, countries are long-lived things, many individual lifetimes.  All of this makes it easy for governments to borrow money cheaply.  Especially when interest rates and inflation are low, there's no real urgency to cut spending.  Sure, sooner or later it has to be done, but why now?

In truth, the obsession with the deficit clearly goes beyond economics.  Osbourne wants to present himself as the economic mastermind behind the recovery in governmeny finances after the Brown years.  Presenting a zero deficit is clearly something he thinks will help him win the leadership of the Conservative party after Cameron.  Indeed, he's rather staked his reputation on it, so that he pretty much must do it no matter what the best course of action would be.  In this sense, I'm reminded of Brown, who made a big deal out of keeping the debt below a completely arbitrary percentage of GDP... from whence came PFI, selling off the gold reserves and all the other fun things we remember him for.  Because, to do otherwise, would have been to lose his chance to move from Number 11 to Number 10.

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