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Until Tuesday, George Osborne was seen as a bit of a lightweight. Not now. He has set out, in the words of ratings agency Fitch, an "ambitious deficit reduction path, that if delivered upon, will materially strengthen confidence in the UK".
Investors agreed: both the pound and the bond markets strengthened when the chancellor sat down after his emergency budget. We do too. We've been in the "cut now" camp for a while – we're more frightened of the consequences of the fast rise in our national debt than anything else. So we're pleased to see a plan that aims to get the deficit down to £37bn by the end of the parliament.
We're also thrilled by the outbreak of common sense that much of the budget demonstrates. There are 100-odd families in London getting more than £100,000 in housing benefit, for example (or rather, their landlords are). That's just silly. Cutting and capping it is sensible. Freezing public-sector pay is also reasonable at a time when private-sector pay is pretty static too – particularly as the genuinely low paid will get a flat £250 pay rise a year. That's clever too – it helps close the gap between the lowest paid and the rest, but sets no precedent in percentage terms.
The freeze also made it a smart time to reinstate the earnings link with the state pension. As average earnings clearly aren't rising, this won't break the bank for a few years. The capital-gains tax business was also nifty – on Wednesday lower-rate tax payers woke up thinking they'd still pay just 18% on any capital gains. Not so. If they sell a large asset, odds are they'll be knocked up to 28% (see page 28). I don't like this – it means long-term investors will be taxed on inflation, not real gains – but at least it's simple. And VAT going to 20% is reasonably smart. A rise of 2.5% isn't that much – anyone remember noticing when it moved from 15% to 17.5% back in 1991? Exactly. Don't forget that the exemptions (food and so on) remain: social justice hasn't been completely sacrificed for the sake of a balanced budget.
But all this fair-sounding stuff is just the start. The key part of the Fitch quote is "if delivered upon". Raising taxes a bit is easy. But most of Osborne's deficit-slaying plan comes from spending cuts, which will come in at 25% of some departmental budgets.
The bad news about these wasn't in the budget: for that, we have to wait until autumn's spending review. Osborne kept saying that the relearning of "the virtue of financial prudence is unavoidable". We agree. But that doesn't mean the nation will be entirely onside when he starts cutting 25% of the education budget – and when the power of bureaucracy means it's teaching assistants, not administrators, who end up unemployed. There was a view that this budget would give us a summer of discontent. More likely is that the spending review will give us a winter of discontent.
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Merryn Somerset Webb
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