| Principal's Response to June Budget |
|
The Budget ‘Crisis’ is a much overused word. It applies most appropriately to situations where lives are in danger and apocalypse is nigh on unavoidable. It is doubtful that the UK economy currently faces such a situation but the ‘emergency budget’ was designed to address the dangers of the current ‘economic crisis’ which has been caused by the build up of a massive public sector deficit generated, at least in part, to fund the bail out of our over indulgent financial institutions. The consequences of the Budget are far reaching and will be long lasting. It marks a turning point in British politics and for British economic policy which is as significant as the change in direction introduced by Margaret Thatcher when she was Prime Minister. Specifically, the budget shares the pain of paying for the accumulated deficit but there can be little doubt that the onus of the pain involves a redistribution of income from those least well off in society to those who are better off. In short, it is a regressive budget – VAT hits the poorest hardest, welfare cuts hit the least well off, public sector cuts most affect those in need, a freeze in public sector pay in Scotland – without really knowing who is in the public sector anymore – most affects those on low incomes. To pick up on the notion of ‘public sector pay’, does this mean that staff at RBS earning more than £21,000 will receive no pay increase for two years? Whilst not being a supporter of ‘prices and incomes policy’, having lived through the failures of the ‘70’s and 80’s, I understand why such a policy is attractive to the new government. But, the policy has never worked! The initial sting of the VAT increase has been cleverly delayed until after Christmas but will affect those on lowest incomes most. In addition, it will add to inflation and put further pressure on wages as a consequence. The increase in tax allowance will assist those on low incomes but it will do nothing for those who are not in employment. All in all, it is a brave move which will raise significant revenue but will have consequential effects on the economy for years to come due to the ‘leads and lags’. To an extent it is an enterprising budget which encourages ‘entrepreneurship’ – especially outside London – and reduces corporation tax over the next few years. This will support business start ups and business development. What a shame for Scotland that the tax incentives for computer gaming were withdrawn. This is a real negative and is likely to result in future businesses, in a sector where we have genuine international expertise, setting up elsewhere because of a more supportive tax environment. The outstanding issues from the Budget relate to the nature and scale of the cuts in public sector spending. We will not know, specifically, where these are going to fall for some months. In Scotland it will not be good news given our over dependence on the public sector for employment. We should brace ourselves for major cuts in transport and education. The jury is out on health. We should not delude ourselves, these cuts in employment will be significant and they will have a multiplier effect as they impact on aggregate demand in the economy. Overall, the Chancellor has done the job he set out to do. Internationally confidence in the UK economy has risen as has the value of the pound. The ‘gnomes’ in Switzerland and elsewhere are now more confident in our ability to make ends meet than they were before the Budget. For the moment at least we will avoid the trauma faced by Ireland, Greece and a few other European economies. But, if we cannot stomach our own medicine the issue of international confidence in the UK economy will re-emerge with a vengeance. So, whatever we may think about the fairness or otherwise of the budget there is a bigger game to play. Pray to your God but tie up your camel! Professor Bill McIntosh, Principal Carnegie College 24 June 2010 |
