Labour's emergency budget
Downing Street/CreativeCommons
This was much more than an autumn statement; more, even, than an ordinary budget. What Alistair Darling set out in the Commons today was effectively a master-budget for the next seven years, spelling out the government's plans to combat the recession we're already in, to bring government accounts back into balance over the next Parliament, and to shift the burden on to the better off to bring that deficit down. It's by far the most left-wing and the most daring budget by Labour since they came into government in 1997.
Alistair Darling predictably heaped blame on "America" for the country's troubles, and that line may be credible to some extent since the credit crunch did start in the United States. I doubt it's good enough to deflect blame entirely though, for where we find ourselves now. Gordon Brown has presided over boom and bubble in excelsis since 1997 and has piled up public debt massively while allowing private debt to do the same. I don't say spending should have been less - I think the country needed the huge injeciton of money into the NHS that the government has made, the rise in education spending and the redistribution towards pensioners and the worse off. But it would have been wiser to tax more, earlier, and to take steps to cool the housing market rather than bask in the illusory feelgood it gave off for so long. George Osborne is right to attack Gordon Brown for having talked so often and confidently of having ended boom and bust.
But what of today's measures? Brown and Darling have clearly decided they need to do something to soften the impact of the recession, and to attempt to bring recovery on more quickly. I agree that a fiscal stimulus is a good idea now - worth trying even with public borrowing already so high - and this is without doubt the risk-taking I urged on the government two months ago. A few months ago, conventional wisdom was that Gordon Brown was doomed, and I thought perhaps he should stand down. But he's finally showing some of the decisiveness and political energy he needs to have any chance of keeping Labour in power beyond 2010.
The stimulus obviously comes from cutting VAT to 15% from next Monday. Business may whine about the costs of changing labels - it seems to me that handwritten ones will be good enough for consumers, as long as price reductions are passed on - but at least this measure has the virtue of being immediate in terms of any real economic effect, and of being immediate in terms of confidence. An awful lot depends on this small lowering of costs, and the hope that it will boost consumer spending - it may or may not. Of course very soon we may realise that prices in the shops are not the problem - if deflation begins to take hold, this VAT cut will be overwhelmed and obscured by the effect of naturally tumbling prices. The cut also stores up some political trouble, because it lasts until end of 2009: the government is bound to come under pressure to extend the cut in the last few months before an election. Perhaps they think they can turn this to advantage by accusing the Tories of threatening to restore the full rate of VAT at that time.
There were a few more measures aimed at putting cash in pockets, though. Darling announced a permanent extension to the increase to personal allowances for basic rate payers that was originally a temporary way of compensating for withdrawal of the 10p rate. He's also softened the new car tax regime to make increases less steep on most polluting cars, and brought forward to next spring his planned increase to Child Benefit. He's also threatening to use statutory powers to cap gas and electricity bills if need be.
To help small business, he's spreading the period over which they can pay tax, allowing them to offset more losses against tax and deferring the 1% increase in corporation tax he plans for them. Plus, he's creating a temporary credit scheme for small businesses on flexible terms . On top of this, he's bringing forward capital spending on roads, housing, school infrastructure and energy efficiency.
Will all this make much difference? I'd like to think so, and if it does, Brown and Darling will deserve the votes they hope to win by this strategy. But I wonder whether the Treasury's growth forecasts are realistic, even after the biggest downward adjustment ever: they forecast -1.25% to -0.75% growth next year, which may be optimistic and 1.5% positive growth in 2010, which strikes me as Polyannaish. But I admire the chutzpah of this: it's a gamble that may mark the end of monetarism. That doctrine hit British politics in Jim Callaghan's famous speech to the 1976 Labour conference in which, in words written for him by Peter Jay, the new Prime Minister said
We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.
Thirty years later, Brown and Darling hope they can prove Callaghan wrong - at least in a time when deflation, not inflation, is the present danger. I applaud them for trying.
Just as important politically is the government's long-term plan for coming back into fiscal discipline. Darling projected a deficit for the whole of the next Parliament, and debt will peak in the middle of the next Parliament in 2013 at a dizzying 57% of GDP.
So, from April 2011 150,000, those earning over £150,000 will pay a new higher 45% rate of income tax, affecting the top 1% of incomes, Darling says. I say: good as far as it goes. But this measure will not bring more than a few billion back into the Treasury, the very highest paid continue to pay relatively low taxes, and rates now are much less than they were during the vast majority of Margaret Thatcher's time in office. I'd have welcomed a 50% rate on earnings over £100,000, and and even higher rate - say, 60% - on earnings over £200,000. I think this is extremely tentative redistribution and that the public would have welcomed more of it.
To be fair to him, from 2010 those earning between £100-£140,000 will see the value of their personal allowances reduced, and above that, personal allowances will go altogether. That must be right.
More problematically, from 2011, national insurance contributions will rise by 0.5%, clawing back the biggest share of Darling's deficit. He will raise the lower earnings limit to protect the less-well paid, but the rise will still act as a tax on jobs through employers' contributions. He's increasing fuel tax to offset the VAT cut; and he's planning to cut waste from government spending to the tune of £5 billion.
The credibility of this matters a lot: we'll see what happens to sterling. But what matters most of all is how people feel during 2009, which will be the longest and most critical year in politics for a long time. There's a good chance the VAT increase will have little real or confidence-building effect, that people will experience only gloom, and that 2009 will see voting intentions shift decisively against the government. I'd be surprised if growth and borrowing figures turn out as good as darling projects, and I doubt he's achieve the savings from waste that he mentioned. But Brown and Darling are gambling everything, hoping people will notice some effect, and give them the credit for their activism through the recession. And that no further crises are going to send public debt beyond any semblance of control.
The next election is now warming up to be a major strategic and ideological battle between a neo-Keynesian redistributive Labour, highly activist and believing in state power, and monetarist or at least traditionalist sound-money Toryism, aspiring to tax cuts and spending cuts possibly before that. I expect the turnout at the next election to go up, and applaud Gordon Brown's boldness and decision. He's put on his big red wig.
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