Tag Archives: Budget 2012

It’s official: the Budget was a disaster

When George Osborne launched his 2012 Budget, I was one of a minority of people to praise it.  I admired the boldness of his move on the top rate of income tax, even if I did not approve of it.  And often Budgets look better (or indeed worse) in hindsight that they do at the time.  But that happy fate will not await this Budget.  Today the third successive retreat was announced from its proposals, this time on tax relief for charities – following VAT on hot food, and the taxation of caravans.

I haven’t followed the issues on hot food and caravans in any detail.  The former, at least, looked quite reasonable – and extending the base of VAT is quite sensible policy.  The regressive impact of such an extension (i.e. the idea that they affect poorer people proportionately more that the rich) is generally overdone by lobbyists and mischief making politicians.  The charity issue (limiting the amount of tax relief on charitable donations) was an idea that looked more sensible the more I thought about it.

What went wrong was the politics.  The measures came out of the blue and sowed panic.  As I blogged at the time, the charity lobby has shown formidable political skill.  The sort of skill that this government seems to lack.

This does not bode well for the stormy European waters ahead.  Downing Street needs an Alistair Campbell – a no nonsense head of communications with a feel for the tabloids – who once again have shown their ability to set the political agenda.  And his 0r her brief must be to make the Coalition as a whole look good.  It doesn’t help that both Tories and Lib Dems are spending so much time trying to show differentiation from each other, however understandable that might be.

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Can our bankers learn from the charities?

My applause for last month’s Budget on this blog looks more out of touch by the day.  The Budget has led to a string of PR difficulties, for which the government seemed ill-prepared.  First it was the age-related allowances, then hot takeaway food, and now it is charitable giving.  Perhaps the back-and-forth of coalition deal making leaves the PR behind.   But what the last week shows above all is just how skilled the charitable sector is at public relations and lobbying.  There is quite a bit of fuss about corporate lobbying in politics, but businesses look flat-footed by comparison.

The wave of protest from charities over the government’s proposed minimum tax on income is building into an overwhelming tsunami.  How have they achieved this, over a relatively obscure rule that affects only a few people?

Inevitably, truth is one of the first casualties in a battle like this.  It’s not that anybody is putting out lies, it’s that a concentrated smokescreen has been built up, so that few people have any idea what is really going on.  There are a couple of fine examples from last week’s radio coverage on the BBC.  One was a survey conducted by one of the lobbyists of charity chief executives asking them whether their charity might be seriously affected.  This was a bit like asking them “Do you want tax relief on charity giving to be restricted?” – not surprisingly nearly 90% said that they were.  This 90% figure quickly did the rounds to give the impression that 90% of charities would be in serious trouble.  In another case one senior person from one of the lobbies was asked how much charities would lose; she replied correctly that this was very difficult to estimate, and then proceeded to give a rather large and rather precise estimate – which quickly got quoted all over the place.  Very quickly the impression has been raised that charities’ income is going to be affected drastically, with the result that all sorts help to the poor and needy was going to get cut back.  Since then a steady stream of charity, arts and university types have piped in to add to the overall impression of impending disaster.

Meanwhile the government response has been a bit weak.  Some Customs and Revenue types were allowed to air their prejudice that most charities were tax dodges – but this idea was no more based on substance than the charities’ claims, and didn’t really help.

And as for the truth, I await some rather calmer analysis from the rather limited number of purveyors of calm, like The Economist.  For now what interests me is the pattern of the PR effort.  The basic idea is common enough from ordinary business PR.  A new regulation or tax is proposed that might force your business to change the way it does things.  So you scream murder and claim that the change will bring an end life as we know it.  Sometimes these claims may be grounded, but most often they are not; the thing is not to think about it too hard.  Anti-pollution regulations offer an instructive example: these are usually opposed vehemently by the industries that they affect; and yet the air and water  gets cleaner while the economy continues to prosper (the most widely quoted example of egregious protest was against sulphur dioxide pollution, in the 1980s, I think).  The general idea is that policy is developed through an adversarial process, like the British legal system.  Make your case as effectively as possible: the truth is somebody else’s concern.

How have the charities been so effective?  First of all they succeed in creating the impression that what they do is for the benefit of poor and needy, both here and abroad. The huge amount of marketing expenditure by big charities like Oxfam and Cancer Research, plus all those public sponsorship campaigns involving celebrities (like the recent Sports aid) help here.  Of course the picture is more complex than this: a lot of charities are about providing elitist education and entertainment (i.e. art) and some are downright nefarious extensions of rich egos.

Given this complex picture, the key thing is to keep solid and keep the message simple.  The supporters of poverty charities have not fallen into the trap of criticising their elitist fellow travellers – as this would fatally complicate the message, as well as opening a can of worms.  A second important point is timing.  The charities waited for the fuss over age-related allowances and Cornish pasties to calm down, before launching an onslaught.  And that onslaught looked well coordinated.  Whether or not their was much coordination I don’t know – but all that’s really necessary is to play follow-my-leader, which needs very little pre-planning.

Positive image for a few key leaders and low profile from the rest; simple oppositional messages; solidarity.  Can that PR disaster that is the British banking industry learn from this?  Banking, after all, has done more to alleviate human poverty than the charities ever will, through easing the path of trade and investment, the two real enemies of poverty.

I don’t think so either.  They don’t care enough about their image, and are too rivalrous to do the solidarity bit properly. Better stick to their usual strategy: passive resistance – the slow, patient picking apart and undermining of reform when the politicians are looking elsewhere.

 

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The budget – the coalition at its best

George Osborne is gradually cementing a reputation as an effective Chancellor of the Exchequer and skilful politician.  He certainly understands coalition politics and how to play for the longer term.  Yesterday’s was a very interesting budget.

There a two schools of thought about coalition governments.  One may be characterised as “lowest common denominator”: all the bold ideas are knocked out and we are left with a few messy compromises that lack any kind of coherence.  The second is the “natural selection of ideas”  in which the ideas of the various parties have to compete on their merits and the weak ones don’t survive, the sum being better than any party would produce individually.  Britain’s first post-War coalition, formed by politicians unfamiliar with how coalitions work, has seen both types of policy formation at work.

The coalition started well.  The initial policy programme was full of bold ideas, while dotty ones (cutting inheritance tax for example) did not make the grade.  But things soon degenerated, as activists on both sides sensed betrayal.  This was especially evident on the NHS, where we are left with a messy compromise that is almost certainly worse than either party would have produced on its own.  But the 2012 budget shows a reversion to the “natural selection” model, for which credit must go to both George Osborne and the Lib Dem leader Nick Clegg.

One of the interesting features of the budget has been the disappearance of budget “purdah” – the absolute secrecy surrounding budget proposals.  Mr Clegg made the early running in the media game with his bid for an acceleration of increases to personal allowances.  But Mr Osborne clearly understood this to be an opportunity rather than a threat – in this case to reverse the top rate of income tax of 50%, which until a month or so ago looked to be entirely off the agenda.  A few years ago the Lib Dems had a big conference battle over this top rate (before Labour introduced it, as it happens) and rejected the 50% – so there was evidently some Lib Dem ambiguity over the tax, which Mr Osborne was able to exploit.  And indeed world thinking has long since turned against such high marginal rates, even for the very rich.

Meanwhile, weaker Lib Dem ideas about how to tax the rich more efficiently did not make the cut.  This applied to the Mansion Tax on high valued property.  Such an idea (though based on land rather than total property value) appeals to theoretical economists, but has two major practical problems.  First is that property is not the same as cash, and that owners of such valuable properties may struggle to pay, and hence create a fuss.  The wider the scope of tax, the more of a problem this is.  The second problem is that it has to be based on a theoretical valuation rather than hard and fast fact.  This is one of those things that becomes more of a problem the more that you think about it.  Property (or anything else) is worth what you persuade somebody else to pay for it, which depends on many factors unique to the individuals taking part in the transaction and the time they make it.  A host of practical issues follow.  The eventual compromise of an increase in stamp duty for properties over £2 million, combined with a clampdown on stamp duty avoidance, looks like a much better idea to me.

The idea of limiting allowances to higher income people so that effective tax is no less than 25%, the “Tycoon Tax” – attributed to Mr Clegg in the proposal process, though not coming out of any Lib Dem official policy – also looks like a very sensible proposal – and this made the cut.

Mr Osborne was also able to push through further cuts to the main Corporation Tax rate.  I have some reservations about this: companies are sitting on too much cash – if they don’t invest it, then the best way of getting this wealth back into the economy is to tax it.  But there is logic to it to help retain footloose international capital, something that the country has been quite good at, but needs to stay in the game.  And it’s not as generous as it looks, since allowances have been kept in check.  In fact the big thing UK companies have been asking for is more generous capital allowances – but the footloose companies aren’t so bothered about this, and the Chancellor did not budge.  I’m not sure that capital allowances have been set at the most efficient level – but I do know that business leaders always ask for too much, and the game is often more about tax avoidance than real investment.

One idea was not leaked in advance.  This was the phasing out of the age-related personal allowances.  This “granny tax” has attracted most of the press attention this morning, with howls of protest that the Labour opposition are seeking to exploit.  Yet the reasoning behind this change is solid enough.  Pensioners have done pretty well under the reforms already implemented by the government, and this is a nasty, complicated piece of work.  Although it is true that many pensioners have been punished by the general reduction in the value of savings since the crisis began, this allowance is a bad way to deal with the problem.  What is actually needed is for the economy to return to health, so that we can get back to a real interest rate of about 2% or so from its current negative value.  It was brave to take on the pensioner lobbies like this, and Messrs Osborne and Clegg (to say nothing of the PM David Cameron) deserve credit.  Critics suggest it may go down as a fiasco like Gordon Brown’s cut of the 10% tax band, or the negligible increase to state pensions the last government implemented when inflation appeared to be very low.  Both were politically very damaging, to Mr Brown and to Tony Blair respectively.  But this policy does not create cash losers (denying benefits to those who haven’t got them yet – rather than taking them away from those that have).  It may even mark a turning point in the battle of the generations, as younger voters start to appreciate just how generous the state is to pensioners, and shift their ire away from the much less costly immigrants and benefit claimants.

The budget does nothing for macro-economists.  There is no bold, imperial stimulus to “get the economy moving”.  But nobody was expecting that.  Overall this budget is a credit to the Coalition government.

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