However much political genius is woven through these long-term plans, the Chancellor runs a fairly obvious political risk. Why, voters may ask, is Osborne still offering austerity? Wasn’t five years enough for him to deal with this deficit? Even by his own estimates, he will be presiding over the slowest recovery in British economic history. His decision to impose slow-motion cuts, totalling less than 1 per cent a year, has dragged out the austerity process further. Two nervous credit rating agencies have already put Britain on a negative outlook. The Chancellor rightly said in his Budget speech that stability comes first, but high state spending may well be the greatest risk to that stability.
With each Budget, Osborne is growing bolder – but still not bold enough. This was best symbolised by his decision to scrap the 50p rate, which is a brave and necessary step, but 45p remains pointlessly high. To his credit, he wanted to lower it to 40p and was even willing to agree to the Liberal Democrats’ price of a mansion tax. This deal was vetoed by the Prime Minister, because it would hurt Boris Johnson’s chances of being re-elected as London Mayor. The end result is that Britain has gone from having the highest tax rate in the G20 to having the third highest rate in the G20.
The Chancellor was saying yesterday that the 50p rate was “a con” which raised no money and deterred entrepreneurs from Britain. He is right, but the same is true of the 45p tax. The data used in the Budget to justify scrapping 50p assumes that the rich (and their money) are no more mobile now than they were in 1988. Had the Treasury felt inclined to draw from more recent independent studies, it would have shown the optimal tax rate as closer to 36 per cent. When a 45p tax was first proposed by Alistair Darling four years ago, even the Institute of Fiscal Studies suggested it would raise “approximately nothing”. But this is, alas, a political decision. Evidence is chosen to fit the policy.
That Osborne has cut any taxes at all in this environment is brave, welcome and reassuring. At present, it’s still dangerous to argue for any kind of tax cut for the best-paid, but it seems a shame to go into battle for so paltry a prize. Labour is, as you’d expect, denouncing Osborne as a millionaire cutting taxes for other millionaires. It is unlikely that he would repeat this exercise before a general election, to achieve a genuinely competitive 40p rate. Cutting tax for the low-paid will be welcome, but will not be enough to offset the pain inflicted by high inflation. And it will be another four years, perhaps longer, before living standards return to their pre-crash levels.
To speed up progress, Osborne’s opportunity is obvious. Without finding more savings in government spending, he will only ever be able to tinker with the tax system and end up robbing Peter’s granny to pay Paul. But even Gordon Brown revisited his spending plans every two years, and there is nothing to stop Osborne holding another one this autumn. The NHS, for example, had its budget more than doubled in the Brown years. If the English health budget was given the same squeeze that Labour is applying to its equivalent in Wales, then there would be enough savings to finance a tax cut easily big enough to pass the OBR’s “blind bit of difference” test.
It is said that most politicians have three good ideas, but get through them pretty quickly. This cannot be said about George Osborne, whose three best ideas are evidently ahead of him. If he succeeds in breaking the unions with regional pay bargaining, and offering the lowest corporation tax in the G7, then he may well change Britain as profoundly as the last Conservative government did. But the longer his timetable, the more things can go wrong. Without faster economic progress, the Chancellor risks what would be, for him, the worst epitaph of all: that he was the perfect warm-up act for the next Labour government.