Review of the April 2009 Budget

Our analysis of the "hardest budget since the Second World War", and what it means for job-hungry graduates

The Chancellor of the Exchequer, Alistair Darling, presented his budget last Thursday. Here is what he announced:

1. The UK economy will shrink by 3.5% this year but will start growing again the year after next at a rate of 2.5% - above its long-term trend rate

2. There will no cuts in public sector spending which will actually grow this year, although £15 billion of efficiency savings will be achieved starting in 2011 (after the next election!)

3. The top rate of income tax will rise to 50% (before the next election!)

4. The Government will borrow £175 billion over the next year and £703 billion over the next five years

Let's look at these in turn...

First, our shrinking economy...

Only in November 2008, Darling predicted the economy would actually grow by 2.5%. Now he thinks it will shrink by 3.5%. So he got it wrong by 6%: a staggering error in a staggering short space of time.

If Darling can't see six months ahead, what can he see?

Well, for starters he thinks he can see strong economic growth returning in full-swing by the end 2010. Who is he kidding? No one believes this. The IMF does not believe it. It thinks our economy will shrink by 4.5% this year.

If Darling has his predictions about growth wrong, every other assumption (on tax, spending and debt) will be wrong too.

Given almost everything he has done in his short tenure as Chancellor has been wrong, I suggest he is more likely to be wrong than right now.

Second, the refusal to cut spending on the public sector...

Alistair Darling cannot see what I hope is stark-staringly obvious to the rest of us - that if your costs are higher than your income, such that you are making losses, you have to cut back on expenditure.

Who in their right mind, if they are already in debt because of inefficient over-spending, keeps on spending - in fact spends even more - rather than making cuts? It defies belief.

Yes, Darling announced there would be £15 billion of 'efficiency savings' (not cuts mind you) but they will not be made until 2011 - after the next election.

Prior to the election, Darling and Brown will simply put their heads in the sand, less they alienate the last few remaining of their loony left supporters who might still vote for them.

If these efficiency savings can be made in 2011, why can't they be made now? In fact, if they have been identified, why have they not already been?

£15 billion is a drop in the ocean. We need savings of £100 billion right now.

Third, the increase in the top rate of income tax...

So Darling ducked announcing any spending cuts. What did Darling announce? That he is going to put up income tax on people earning over £150,000 per annum to 50%.

Pathetic. This is a political measure, not an economic one, designed to appeal to Labour Party back-benchers, not fix the economy.

This measure will lose as much tax revenue as it raises as the people it affects will simply work abroad or find ways to disguise their income or even just work less hard.

After all, if the Government is going to take all your money and waste it, why earn it in the first place?

Given we all pay over 10% national insurance (itself a stealth tax), how can it possibly be fair that someone pays 60% of what they earn to the Government to have it spent for them? Why don't they just spend it themselves?

I hate the arrogance of Government Ministers who think they can spend money in a more apposite way than the individuals who earned it.

Tax, by definition is a penalty on hard-work and ability, while many state hands-outs are a reward for sloth and inability.

Social security creates a moral hazard where people are given an incentive not to work.

Last, our mountain of debt...

Under the last Conservative Government, our national debt as a proportion of GDP remained fairly constant at around 36%.

This year, after 12 years of Labour Government, it will rise to 46%.

Then it will keep on rising, so that by 2014 it will have reached an astonishing 79% of GDP.

We are literally drowning in debt run up by Gordon Brown wasting our money on a ludicrously bloated public sector that we don't need and cannot afford.

To borrow all this money, the Government will have to sell bonds in the debt market. So it is now at the whim of the very market that it allowed to run away with itself in the first place.

Because once the debt market does not believe the Government's forecasts, it will refuse to buy Government debt.

At this point, Britain would be bankrupt. I am not sure what it would do then... Go cap in hand to the IMF? Print more money? Who knows.

Summary

In short, Darling and Brown bottled it.

This was an intensely political budget that totally abrogated the Government's responsibility to manage the national economy.

Britain is massively in debt and over the next five years is going to sink even deeper into debt.

The right thing to do was to make proper cuts.

No one wants to do it, but if you making losses and already in debt, then that's what you have to do.

The Labour Government did not do this for one reason only - to try to cling on to as many public sector worker votes as possible at the next election.

To save its own skin, or at least to lose it less badly, the Labour Government has chosen to ruin the country.

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