The details are a bit complex, but ultimately it all boils down to a pretty simple question: Why did the government increase taxes in the last budget? Judging by the Prime Minister’s answers at a press conference, you might have thought the answer was, \u201cBecause we had to.\u201d <\/p>\n
The Prime Minister told a journalist, "There was an OBR productivity review. The result was that we had \u00a316 billion less than we otherwise could have had. That’s a difficult starting point for any household." He repeated the same point again and again: the OBR had revised its forecasts for the UK economy and the result was that the government had a \u00a316 billion hole in its accounts.<\/p>\n
Budgets are mostly about the difference between two numbers: income and expenses; taxes and expenses. This government has imposed a budget rule: it must ensure within a few years that, after investments are deducted, the tax limit must be higher than the spending limit. At the time of the last budget, taxes were actually higher than current expenditure, taking into account the business cycle, or to put it in the language of economists, there was a surplus in the cyclically adjusted current budget.<\/p>\n
The Chancellor had met her budget targets by \u00a39.9 billion. This is not a lot of scope to meet budget requirements. In a typical budget, there may be revisions and changes that would suddenly overwhelm the budget. Part of the explanation for why there was so much speculation about tax increases over the summer is that the Chancellor left herself so little \u201cleeway\u201d with the rule.<\/p>\n
Over the summer, the OBR told the government it was doing something else: reviewing Britain’s productivity. This set alarm bells ringing in Downing Street \u2013 and understandably so. The weaker productivity growth, the less income we all earn, and the less income we earn, the less tax revenue flows into the state coffers. The early signs suggested that the productivity review would reduce the Chancellor’s "headroom" by tens of billions of pounds – that it could wipe out the \u00a39.9 billion in one fell swoop and send it into the red.<\/p>\n
But here’s the interesting thing: When the bad news (that productivity score) finally arrived, it was far less grim than expected. It\u2019s true: the one-off productivity \u201cdamage\u201d to the public finances was \u00a316 billion. But this was offset by a lot of other, much better news (at least from the Treasury’s perspective). Higher wage inflation meant higher expected tax revenues, not to mention a host of other impacts. All told, the damage to public finances was not \u00a316 billion, but somewhere between \u00a35 and \u00a36 billion.<\/p>\n
Why does this number matter? Because the Chancellor’s scope is currently \u00a39.9 billion. The OBR’s forecasts were not enough to force them to raise taxes. In other words, the decision to raise taxes was based on something else. What it came down to was the government making a U-turn on a number of its welfare reforms over the summer. It boiled down to the fact that they wanted to remove the upper limit for the two-child benefit. And on top of that, they wanted to increase their \u201cleeway\u201d over budget rules from \u00a39.9 billion to over \u00a320 billion.<\/p>\n
But when the Prime Minister explained his budget decisions, he focused primarily on the OBR report. Worse still, he selectively quoted the \u00a316 billion figure from the productivity review without acknowledging that this was only part of the story. That seems pretty misleading. The decision to raise taxes was based on the government’s own decisions, not a knee-jerk reaction to someone else’s bad news.<\/p>\n","protected":false},"excerpt":{"rendered":"
Introduction to the Budget The details are a bit complex, but ultimately it all boils down to a pretty simple question: Why did the government increase taxes in the last budget? Judging by the Prime Minister’s answers at a press conference, you might have thought the answer was, \u201cBecause we had to.\u201d The Prime Minister’s<\/p>\n","protected":false},"author":1,"featured_media":27815,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[36],"tags":[18432,5824,2903,19338,744,19714,13937,1194,8089,66,367,2222,16002,752],"class_list":{"0":"post-27814","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-10-downing-street","9":"tag-budget","10":"tag-business-cycle","11":"tag-child-benefit","12":"tag-decision-making","13":"tag-expense","14":"tag-financial-statement","15":"tag-government","16":"tag-income","17":"tag-money","18":"tag-prime-minister-of-the-united-kingdom","19":"tag-productivity","20":"tag-real-wages","21":"tag-tax"},"_links":{"self":[{"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/posts\/27814","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/comments?post=27814"}],"version-history":[{"count":1,"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/posts\/27814\/revisions"}],"predecessor-version":[{"id":27816,"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/posts\/27814\/revisions\/27816"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/media\/27815"}],"wp:attachment":[{"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/media?parent=27814"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/categories?post=27814"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/nanamedia.org\/en\/wp-json\/wp\/v2\/tags?post=27814"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}