Budget: big splash, little cash

Mar 29, 2012

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The budget has continued to make waves, with the ‘granny tax’ and the reduction in the top tax rate from 50% to 45% dominating the political debate. The fuss deflected attention from the bigger economic picture, which remains troubling.

The economy shrank by 0.3% rather than 0.2% last quarter, according to the second official estimate, although growth should be positive in the first three months of 2012.

What the commentators said

This was hardly a “bold, tax-reforming budget”, said David Smith in The Sunday Times: “coalition budgets… will always be messy compromises”. But “in words and in some deeds”, it was a “corrective” to pervasive anti-business sentiment. Trimming corporation tax and lowering the top rate were business-friendly signals.

Still, Philip Booth of Cass Business School pointed out that cutting the top rate from 50% to 45% would cost the government £3bn if the high rate didn’t damage economic activity or encourage avoidance. In fact, the cut will cost the Treasury just £100m. “If there is such a strong case for reducing the 50p tax rate to 45p, then surely it should be reduced all the way back down to 40p.”

Beyond the welcome for “entrepreneurs and financiers”, said The Economist, the budget was a case of “big splash… little cash”. It amounted to ‘micro-fiddling’” as the big fiscal decision was made in 2010 when we embarked on the multi-year austerity programme. And whether the economic growth targets underpinning the plan are met is still an open question.

The worry is that record petrol prices will boost inflation and further dent disposable income, said Jeremy Warner on Telegraph.co.uk. Weak consumption has been “the overarching story” in the past few years. It’s the key reason why four years after the recession began, “output remains a full and stubbornly persistent” 4% below its pre-crisis peak.

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  • 1. Boris MacDonut

    (29 March 2012, 05:14PM)  Complain about this comment

    This myth that cutting the top rate cost just £100 million is tosh. If that is right we could cut to 35% or 30% with little damage. The fact is the 50p rate was given just 18 months. It had not bedded in. Time would have dragged back the timing issues of delayed and anticipated remuneration. Sadly the Eton toffs copuld not wait to get rid of it....and quite bizarrely decided that pensioners should pay. A like for like £3 billion trade off. The Tories have just cut an important vein in their political wrist and they will need plenty of bandages to pull this one back by election time.

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