Is the economy on track?

It is certainly not going off the rails. But when George Osborne said “we are going to earn our way in the world”, we will do this only slowly. Britain is on a stopping train, not a high-speed line.

The broad growth forecasts are little changed from the Office for Budget Responsibility’s November estimates with growth of 0.8 per cent this year rising to 3 per cent in 2016. But economic output remains 3.8 per cent below its 2008 peak and is not set to reach that level until early 2014, a full six years later.

Growth is slow and nobody should think the Budget has changed the outlook. Even though the chancellor said the Budget “unashamedly backs business”, the OBR has made almost no changes to its economic forecasts in light of the Budget changes.

The effect of the cut in the main rate of corporate tax is the best example of the need to keep things in proportion. Mr Osborne called the cut “an advertisement for investment and jobs in Britain”. The OBR poured cold water on this claim. It estimated the effect would cut the cost of capital and increase business investment, but only by 1 per cent by 2016, leaving national income 0.1 per cent higher. In contrast, it said unexplained weakness in business investment in the fourth quarter of 2011 caused it to cut 6.9 per cent off the business investment growth figure for 2012.

Is deficit reduction going better?

No one should deny the public finances are improving. The coalition inherited the largest peacetime deficit in British history of 11.1 per cent of national income, some £157bn in 2009-10, and this has fallen to an estimated 8.3 per cent of national income or £126bn this year. The OBR expects the deficit to fall further, dropping below 3 per cent in 2015-16 and ending the forecast period in 2016-17 at £22bn or 1.1 per cent of gross domestic product.

Also good from Mr Osborne’s perspective is that in 2015-16 the OBR’s central forecasts suggest he will fulfil his ambition of seeing the burden of public debt falling and that by 2016-17 he will eliminate the current structural budget deficit. This is, however, two years later than originally planned.

The delay shows how difficult it is to achieve growth while reducing the deficit. With Britain not even two years into a seven-year £155bn austerity programme and still struggling with growth, it is not surprising credit rating agencies are getting nervous about the UK’s ability to pull it off.

The tax cuts will help growth, won’t they?

Mr Osborne dwelt on the rise in the income tax personal allowance, the cut in the 50p rate, the corporate tax cuts and the mitigation in the withdrawal of child benefit from higher-rate taxpayers, but this was just one side of the ledger.

On the other side, the Treasury scorecard shows tax rises and spending cuts large enough to cancel out any direct effect on demand from the tax changes. Overall, the Budget was close to fiscally neutral with small net effects for the exchequer in every year of the forecasting horizon. There are also new spending cuts after 2014-15 to reflect savings before then on the cost of conflict in Afghanistan.

“The government has announced policy measures that are expected to have a broadly neutral fiscal impact overall and, in aggregate, they have had limited effect on our economic forecast,” the OBR said.

Theory suggests lower taxes and lower spending do boost an economy because taxes distort economic activity, but the changes are too small to quantify.

Is the cut in the 50p rate good?

Broadly, yes. It is very tempting to look at Bob Diamond’s £25m pay in 2011 and say “why on earth is the exchequer letting him keep an extra £1.24m”, but the evidence from Revenue & Customs is pretty strong that the 50p rate mostly encouraged the tax avoidance business.

Two things need to be separated in the analysis.

First is forestalling. Rich people, particularly owners of companies, paid huge dividends to themselves in 2009-10, before the 50p rate was introduced, and the OBR estimates that this boosted income tax revenues attributable to that year by £6.1bn. Consequently, they paid themselves less in 2010-11.

Now Mr Osborne has said the rate will fall to 45p in April 2013, companies will delay dividend payments until 2013-14, artificially cutting revenues in 2012-13 by £2.4bn, the OBR estimates, and increasing it in the two subsequent years.

Forestalling would not matter much if the 50p rate was here to stay, because shifting income from one year to another cannot continue for ever. The nail in the coffin of the 50p tax was the second effect: the Revenue estimate of other distortionary effects from the rate.

These are particularly uncertain, but both the Revenue and the independent OBR believe the 50p rate discouraged labour supply through people taking early retirement, emigration, taking a lower-paid job or working less.

The new forecast suggests income tax revenues are maximised at 48p in the pound and cutting the 50p rate cost only £100m a year. At this price, it is probably worth paying.

But at least millions no longer pay tax?

Having no income tax liability does not equate to no tax liability. Those no longer paying income tax still pay national insurance, value added tax, excise duties and a host of others.

Mr Osborne is simply continuing a long and ignoble tradition of cutting income tax rates while increasing other taxes. It applied as much in Labour years as now.

Worse, the thresholds for income tax and national insurance had been aligned before the coalition became misty-eyed about the level of the personal allowance, a useful piece of tax simplification. Now, people will pay national insurance and not income tax.

They will not feel they have been spared tax altogether.

Who are the winners and losers?

If you are elderly with a modest pension, freezing the income tax age allowance will hurt. Smokers, drivers of company cars and buyers of expensive homes were other losers.

Gainers include rich people who can pay themselves in 2013-14 and save lots of money, while looking down on the vast majority of taxpayers gaining just £14 a month from a higher personal allowance.

Will Britain be OK?

Nobody really knows. There is still a long way to go before the economy and public finances approach normality and many things could go wrong. Europe is a danger, continued weak productivity threatens the outlook, as does a lack of animal spirits to drive investment. One Budget in which the forecasts do not deteriorate much is encouraging. But it is the first for four years.

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