The first coalition budget

In the bad old days of Brown’s budgets, and to a lesser extent Darling’s, it was a mistake to comment too soon because the problems were always hidden in the small print released afterwards. George Osborne has admirably been straight with his presentation so it is easy to see the impact quickly.

The headline comments have been about the increase in VAT to 20%; the headline criticisms that this and the cutbacks will damage the economic recovery and impact poorer people more.

I think there are more points of underlying importance than this:
- The budget has started to get to grips with our budget deficit. As I said earlier, it is so big that interest costs are a major outflow from the economy – and a growing part of the deficit. Early action matters, and the quick next day assessment of the budget by the gilt market was good; the UK’s funding costs have reduced slightly.

- Some of the apparently softer cuts will have a big impact on the deficit: a two year restriction on public sector pay increases –with none for employees earning over £21,000 – and increasing benefits by the CPI rather than RPI will save a lot of money quickly.

- The budget sets a positive direction for businesses in terms of tax reduction and simplification. The most important way we will get out of the current mess is for the private sector to grow. Lower and simpler taxes help confidence. This is the first budget for years to have an approach of freeing the private sector rather than tinkering with it.

I think the criticisms are overstated. The VAT rate will not increase until January 2011, which gives time for the confidence boosting measures to work; it is also likely to bring forward spending to benefit the economy in 2010. Less wealthy people tend to spend a greater proportion of their income on non-vatable goods, and so it is less regressive than you might think. In addition, there are specific measures (tax thresholds; housing benefits) targeted at the poor.

I think the main criticism is that the details of the tax cuts are still to come, in the Autumn expenditure review. This delay is inevitable but still permits uncertainty till then.

Overall, it is refreshing to have a budget that is transparent, focused on sorting out the problems and giving an optimistic direction for private sector growth.