Wednesday, 21 March 2012

Faute de Mieux

Counting the years
Occasionally if you ever go to St James Park, London, in the evening you are likely to run into some cabinet minister or, God forbid, an ex-Prime Minister burning of their calorific Westminster Diet. Your Blogger found himself in this predicament when he was rushed by a hoodlum of joggers on Monday evening in the park, which consisted of the British Prime Minister and his portly minders. No doubt training for the Bare-knuckle fights of Budget Day.

Today was the Chancellor's Budget Day. All in all it was a humdrum affair given Her Majesty's Treasury did away with the long held precedence of purdah held before Budget Day. The major pieces of the Budget are threefold. Firstly, the Top rate of Taxation for those earning above £150000 is coming down by 5%, to 45%; far cry from the suffocating 95% common before the 1970s. Secondly, Taxation will start on those earning above £9205, the new personal tax allowance threshold. And Thirdly, Corporation Tax is set to decline to 24%, with the gradual target of 22% before the next general election and, if the government is re-elected, 20% ex post.

The first and third pieces make sense, Britain's comparative advantage and trade lies in financial, legal and glamour [fashion, advertising, management, accountancy and so forth] services; boosting those shall help the economy stutter along. The 50% top rate was the highest for any major economy, and was an act of desperation from the last rueful days of the previous Labour Government. The second piece is a placebo compromise along with the 7% stamp duty on home sales above £2 million, to the Government's Coalition partners: the ever dithering Liberal Democrats.

The Government also has its eyes on balancing the Budget in the long term. In the sense of decreasing the rate of annual net borrowing; the amount which cannot be covered by taxation. In, perhaps, Britain's worst period of stagnation since Napoleonic Times, this may prove all too much for any chances of recovery. In the above graph, the Bank Base Rate has been at its nadir; when in the entire 314 years of the Bank of England's History the rate never went below 2%. Additionally, the Bank has been printing money to make government borrowing cheaper, what PR firms have obtusely called Quantitative Easing. Government borrowing is also at is cheapest; encouraging the Chancellor of the Exchequer to raise longer Bonds of more than 50 years, the nomenclature the FT have given to it are the 'Osborne Bonds'; maybe a lasting legacy of the Current Government for future generations of Brits.

With all this in mind, it strikes me as odd that fiscal conservatism should be the priority of the day. Recession Economics is not normal Macro 101. However the Budget for the faute de mieux, as the opposition have themselves no clear idea on how to stimulate the economy, is a good start to encouraging the expenditure of the £700 billion-odd cashpile British businesses have tucked away under their pillows.

Additionally, Britain stands out amongst advanced economies in its resolve to handle the post-Crisis period. The continental economies have an Albatross around their neck in the form of an ill-thought out currency union. Japan has entered its third lost decade. The United States is far too big to model economic policy on and has its own unique set of problems. Policymakers at Westminster have a long decade ahead in which to shape out the 'Kaleidoscope' Economy they so very much crave for; this Budget marks a good beginning in encouraging private enterprise and investment.