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Dealing with Labour's Legacy

The public finances will be a challenge over the next 5 years. Apart from the tax and benefit changes in the budget yesterday there are also the cuts in public spending.

All of these arise from the mismanagement of the economy by the previous government. We should have been in the situation of Germany (who went into the recession in surplus) rather than Greece.

The situation is straightforward. It compares to a household that has fallen on hard times and needs to bring its income and expenditure into line.

You can do this without external intervention. You can do this when you get the court orders and end up paying court fees. Alternatively you can wait until you go bankrupt and the bailiffs are at the door.

The bailiff bankruptcy option is like Greece.
The court orders and court fees option is like Spain.
The DIY approach is what we are doing.

The key to all of this is that by controlling public finances in a proper manner there will be less cuts than was otherwise necessary.

In terms of the details of the budget people who are on lower incomes have been protected. Those people on higher incomes will pay higher CGT rates than Labour had proposed.

There is an argument about VAT which is what the chart below is about. The chart looks at households by the size of the household budget. There are households with a low income, but high expenditure (many times the income) who are living off capital. These should not be compared to households on a tight budget. Hence the decile analysis (grouping households into 10% cohorts) by expenditure is the proper analysis.

The chart below is from the budget and demonstrates that the indirect tax changes (mainly a vat increase) are in fact progressive and not regressive - notwithstanding the claims of various lobby groups. That is because there is no VAT on food and basic costs (such as residential rents etc).

vatprogression

At the same time we really should not be shelling out £104,000 per year on housing benefit for one family. These excesses must be brought under control. Further it is good that the civil list will be subject to scrutiny in the same way as other public spending.

All we have to do now is to ensure that MPs are also subject to a public sector wages freeze. That, however, is left to IPSA.

Comments

Jerry said…
"That is because there is no VAT on food and basic costs (such as residential rents etc)."

John, there will be a significant rise in the cost of food and basic costs, due to VAT rises. I am confused to see why you say there won't be.

The costs of delivering the food along with costs of producing the food will increase the price of fuel will rise in January for one example, the producer will relay the increase to the consumer, so the cost of food will rise.

Watch the price of a loaf of bread, its average price today is £1.17 a loaf, heaven only knows what price it will be next January.

What frustrates me with this budget and like the many more previous to it, is the poorest 10% of the population will be even worse off, the Ministers who set this budget have no idea what its like to live on the bread line, These 10% don't just watch the pounds but the pennies too.

I also cannot understand the thinking behind the point by Osborne that child poverty will not increase.

Child benefit is frozen, but the VAT increase will make the poorest households worse, yes we have the Child Tax Credit increase by a little over £3 a week, this will not even shadow the overall weekly increase in costs of the poorest families.

Why don't they get a Job is always spouted, like myself I would walk into a Job tomorrow if I could, for ever job advertised there's 80+ applicants for the advertised job, people who are poor don't stand a chance, been there and seen it for my own eyes. I know a lot of famlies who are not able to get a job through no fault of their own.

Its nice putting graphs and charts explaining things which while I agree, does absolutly nothing to help the poorest folks in society, its looking like we are heading back to the 80's.

The poorest are going to be forced to borrow way beyond their means if only to just survive.

Why should the poorest suffer time and time again for what the richest of the country did to the balance sheets.
John Hemming said…
The VAT on fuel for food producers is reclaimed.

Those people on benefits will get more benefits as the child benefit is frozen.

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