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).
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.