Melvin's Budget

(Long post today, collated and written over many days. Enjoy).

‘Medialand’ is of course fixated on the Budget day announcements. This budget is important, as I said here, because this is the last budget that will have any affect before the 2015 General Election. The impact for the first time of a ‘fixed term’ Parliament is important here. Normally, right now, Boy George would be having to run both a ‘go early’ strategy and a ‘full term’ strategy. The ‘go early’ option always used to pressure Chancellors to start the great give away sooner than was really sensible. Boy George has no such problem. He can afford another year of pain before two giveaway budgets in 2014 and 2015.

Many things the Coalition has done have had my full support. But if I have a fundamental criticism of them it is this: because of the shocking state that Government was in when they inherited it, and the depth and immediacy of the financial crisis we were all in, they have concentrated exclusively on the ‘here and now’. This Budget is the time to show the long term plan. Where do we want to head; what is our destination? We need the short term changes required of course, but set out against the backdrop of - to use a Tony Blair term - ‘the narrative’. You can only hit the punters with the stick for so long before you have to show them the carrot or else they start complaining.

So this is the Budget for Boy George to show his direction of travel upon which the Tories will fight the next election. He should be saying:

“Government cannot solve every problem. Individuals can mostly solve their own problems. The previous 13 years of the Left’s misguided faith in ‘Government action on all fronts’ has meant that Government has got too large, too bloated and, as ever, is terribly inefficient. We have looked for too long for Government to solve every injustice, every crisis, every problem.

“This has meant that it has taxed too much and borrowed too much to try and pay for everything it has tried to do (mostly badly) and that was one of the fundamental reasons our recession has been so bad compared to many other nations.

“And yet, we are still spending more than the taxpayer can afford. We still need to trim the size of Government. We need to decide what the Government actually does and what others are better at doing. Government needs to do less and do it better.

“And, most importantly, we are a low tax party. And we will progressively reduce taxes for all. We believe that people should keep their own money as they are almost always better equipped to make the right decision for their family on how to spend it for their benefit.

“So by 2020, we plan to have cut Government by x% and increased its efficiency by x%. At the same time we want to ensure anyone earning £12,000 or less pays no tax at all. And our top rate of tax should be under 40% to make us really internationally competitive. And this Budget sets us on that course.”

I’d love him to say that, but he won’t of course. Nevertheless, I am going to ignore all the Budget small print so efficiently leaked these days and concentrate on some of the bigger stuff I think he should be including.

What should the Government’s strategic economic priorities be?

First, pay down that deficit as fast as possible. Funding the interest on Brown and Ball's debt is costing us taxpayers around £50bn this year. That's about 7% of all Government spending. More than we spend on defence (£40bn), law and order (£33bn) and transport (£23bn). Madness. Thanks, Labour.

Second, aim to balance the national budget as soon as possible; that is, spending each year no more than we collect each year from us taxpayers. This year we are borrowing around £127bn to balance the books. Behind income tax (£158bn), but ahead of National Insurance (£101bn) and VAT (£100bn), borrowing is still the second largest source of income for our Government. Thanks Labour.

Third, as a fundamental matter of principle, plan thereafter to run a budget surplus over the term of each Parliament. Forever. Forget over borrowing. Keep us in the black. This means that we will always be prepared properly for the next recession and never be anything other than a AAA rated country. It also gives us the ability to do other things listed later in this post.

Rebalancing government spending

Our top 4 spending budgets are social security (£200bn), health (£126bn), education (£89bn) and defence (£40bn), (putting aside Brown and Balls’ £50bn debt interest as mentioned above which is the 4th highest spend in Government). This is completely out of balance. We are spending way too much on social security and health and way too little on defence and infrastructure - roads, rail, energy etc. This has to change.

To be fair to the Coalition, they have started well with IDS' re-engineering of social security and Lansley's much (unfairly) derided re-engineering of health. But much much more needs to be done here. To take one simple example, the DWP announced last week that 71% of disability benefit claimants either have no reason to be on the benefit at all or could work with some assistance. And that’s just one benefit. And don’t get me started on the NHS which always reminds me of that famous Ronald Reagan quote: “Government is like a baby: an alimentary canal with a big appetite at one end and no sense of responsibility at the other.”

Meanwhile our defence budget is in tatters. We are now a third world defence nation with second world needs and first world aspirations. We are building a couple of massive aircraft carriers but cannot afford the planes. Thanks Labour.

I don't know exactly what the right percentages are - greater minds than mine can work that out - but we need to rebalance departmental spending badly. We are currently spending around 2.7% of GDP on defence. Countries like Botswana, Chile and Morocco spend more than that. It’s pathetic. Thanks Labour.

How to pay for all this?

The cold hard truth is that until the deficit is under control, now it not the time for tax cuts, however much the Tory Right and business bleats. Any give aways tomorrow should be fiscally neutral ie should not increase or decrease spending or tax.

Let’s now cover that thorny issue of the 50p tax rate. This is very simple to deal with. As a matter of principle and good practice, no tax should cost money. All taxes should raise money. This tax costs and thus has to go. It’s pointless. It was a political not an economic initiative carried out as a cynical act the month before Gordy left office and expressly to make life uncomfortable for Boy George. And in that aim it has worked. But it’s loony. It depresses the money HMRC earns exactly when we taxpayers need HMRC earning more. Madness. Thanks Labour.

Georgie Boy will want to go for 45p first so that the Lefties can’t whinge too much. The problem is we may get stranded at 45p if the wind changes in the future and 45p may not change the rich’s behaviour. Remember where we are on that horrible league table of top rate income taxes. 45p doesn’t help us much. It is making us an unattractive investment target. It should go altogether. It makes no economic sense to keep it.

And on the subject of tax cuts, as I have said before, the only tax cuts that deliver growth are income tax top rates - that pesky 50p again - CGT and Corporation Tax. If we need growth, these are the ones to target, not basic rate thresholds (Lib Dems) or VAT (more Balls). The OECD agrees so I'm in good company.

The pay and rations of the public sector is already being squeezed. I’m afraid there has to be more. National pay is illogical and has to go. The indefensible union logic that public sector pay should be the same in Newcastle and Knightsbridge is risible. (This also nicely kills the unions’ endless strike ransoms at a stroke. Add to that slaying all the Pilgrims and listing unions as lobbyists. Mrs T would be proud, George).

And we need a new era of privatisation. Governments are always hopelessly inept at running services as the dead hand of expensive bureaucracy ratchets up the cost. Either sell off or transfer service delivery to those that are much better at it - the private or third sector. Don’t just stop at the Royal Mail. Be radical.

Now my reading of Jim O’Neil’s latest book has taught me a little about Germany’s success. Germany’s stellar growth in recent years is very seriously reliant on a clear strategy to manufacture and export to China and India. As China and the other BRICs shift from being cheap manufacturers of our consumer products to being consumers of their own products, we need to cash in on their new found wealth. Third World cheap mass manufacture has killed our manufacturing sector. But we have a hidden gem: precision high tech manufacture. We need a planned and targeted incentive regime to massively grow that sector fast because all those BRICs are soon going to need our high tech exports, just like right now they need BMWs.

A final thought: we need a UK sovereign wealth fund. We need to generate investment income just as China, Abu Dhabi, Qatar, Norway and all the rest. We can’t do that now, but we need a plan for it sometime soon.