The latest (21 March, 2012) British budget is the third one that the present Chancellor of the Exchequer (George Osborn) has delivered during his term of office. For the first time in many years the Chancellor did not need to announce any more bad news on Britain’s finances. Official forecasts for the economy and public borrowing were practically unaltered. The country remains on a comparatively fast track to eliminate its structural deficit (via measures announced by Mr Osborn in 2010). This latest budget also did nothing to disturb Britain’s bond rating.
However, the budget appeared to give a strong signal that Britain is a profitable place in which to invest and conduct business. Despite a great deal of rhetoric in the build-up to the budget about the need for Britain to re-discover manufacturing, the strong case for more help to the SME (small and medium sized business) sector and the continued plight of cash-starved small businesses, this budget had an apparent different aim. That is not to say that it did not recognise these areas and provide some help, but this was not the main emphasis.
In many respects, this latest budget gave a ‘smart signal’ without weakening other important Government aims and ignoring present ‘gaps’ (like the apparent ‘credit gap’ faced by the small business sector). The budget re-affirmed (at least tacitly) Britain’s marked comparative advantage in banking and financial services. Britain is still a world leader in this sector and hosts in London one of the world’s greatest financial centres, consistently ranked in the top two world financial centres (with New York) and number one in the world on many criteria. The Government appears to have recognised the need to support this enviable resource and help sustain Britain’s dominant global positioning.
The strongest signal from the latest budget to this effect was cutting the top rate of income tax (from 50 to 45 per cent) on incomes above £150,000 ($238,000) per year. The much-maligned 50 per cent rate served to incentivise financial firms and their top employees to leave and/or not come to the country (especially London).
This key specialism marks Britain as a successful ’knowledge economy’ leader. High quality (and, therefore, highly paid) employees and the best entrepreneurs from the global market are an essential input. This is a hard fact of economic life. It is surely in Britain’s best interest to recognise it and play globally to the country’s comparative strengths?
The Budget was hailed as a package for working families and it did, for example, reduce income tax for low-earners. It was attacked as a tax on the impoverished elderly (it froze the age-related personal allowance). The Budget had several ‘giveaways’ (for example, the personal tax allowance was raised to £9,205 and the main corporate tax rate reduced by a further 1 per cent). The ‘giveaways’ were funded by increasing other, smaller taxes (which included a higher stamp duty on very expensive houses) and through closing loopholes.
Overall, this March budget had only a small expansionary impact on the economy. It hardly altered Britain’s fiscal stance. The net cost of the budget was comparatively low at only £1.7bn (around 0.1 per cent of GDP).
On balance, then, this is a budget that gives an apparent strong signal that the Government recognises Britain’s comparative economic strengths as a highly successful country in the global (and fiercely competitive) financial services industry. It gives a signal to the world that Britain is ‘open for business’ and really means business. It is a budget that recognises a hard fact of economic life – Britain needs finance and foreign investment.
The Economist (March 24) points out in this respect: ‘The politics of this will be rough, but it was the right thing to do. Because Britain specialises in high-value services such as banking, accountancy and insurance, it needs to attract the world’s brightest’.
It is in this context that the March budget can be seen as a ‘signalling’ one. At this time it is also a brave political move. In a climate of continuing criticism of ‘banks and bankers’, supporting financial services (again!) is probably not a guaranteed ‘vote catcher’. Nevertheless, it is a pragmatic and necessary signal to give to the rest of the world.
Professor Ted Gardener