Extracts from the Budget Speech which Osborne ought to give today – but, sadly, won’t
I am conscious, Mr Speaker, as I rise to present this Budget, that the economic world in which we find ourselves presents a prospect challenging in the extreme. Across the globe, countries are having to make painful adjustments to the realisation that there are limits to the size to which the state can grow without over-burdening an economy, and that in many cases those limits have been reached: and then grapple with the difficulties of making those adjustments just as the motors of growth and prosperity, global trade, slow down. Many of them, as we are now seeing throughout the Eurozone, and especially in Cyprus, are not succeeding.
We in Britain cannot afford to be so timid as to fail to adopt radical remedies merely because of not wishing to seem out of step. That is why I recognise that I must abandon the excessive caution I showed in my first three Budgets, and have no alternative but to propose measures as bold now, but also as necessary, as those which my distinguished predecessor enacted 25 years ago.
I must first spell out to the House in stark detail just why this is necessary. We have failed to address properly the task of bringing public spending properly under control. In fiscal 2012/13 were are on course to spend nearly £700 billion, of which no less than about £120 billion has to be borrowed. Putting it bluntly, for every £6 the state sector spends, it is funding itself to the tune of only £5, and has to rely on borrowing the extra £1. Three years ago, I stood before this House and predicted that by 2017 we would have eliminated this need to run an annual budget deficit, and would be in a position to start repaying debt. We were wrong, however not to front-load even the cautious measures I adopted curtail the unconstrained growth in public spending. Because of the timidity of the approach we have adopted so far, elimination of the need for an annual Budget deficit will not happen before 2019 at the earliest.
The unhappy consequence of this is that I am in the unenviable position of adding approximately £600 billion to the national debt before we are in a position even to start reducing it. Unless I take the measures I shall outline today, debt will attain something like 80% of GDP before starting to fall back: at those levels it becomes exponentially harder for an economy to recover, and I cannot let that happen.
The monetary policy which the Bank of England has with my full support has, with hindsight, added to the economy’s difficulties. The £375 billion of Quantitative Easing that has been carried out has created an artificial, even distorted market in Government securities which has served to alert international investors that we have been less than assiduous in addressing our debt problem. The depressing of interest rates from lower gilt yields has caused companies and individuals to devote to topping up pension funds money that they might otherwise have spent on investment or modest consumption, thus further arresting any resumption of growth.
QE has exacted a heavy price in terms of inflation: the £ has fallen, on a trade-weighted basis, about 13% so far in 2013 alone, in addition to the decline in the value of sterling since QE began. Coupled with the necessary attrition to pay rates, this has meant a significant reduction in real incomes, eroding purchasing power. Since base products for many forms of energy and power generation are priced in US$, the energy costs of firms and individuals have been seriously raised. Worse still, the expectation of future inflation – I have today been shown analyses predicting an average annual rate of inflation for 3.5% for the foreseeable future – causes cash to be hoarded rather than deployed in the economy in confidence that its value will not appreciably fall.
The arrival of the new Bank of England Governor offers an opportunity to break with the past, and pursue monetary policies more appropriate to rectification of the economy’s present ills. I have therefore today written to the incoming BoE Governor, making it clear that monetary policy must not in any way embrace either further tranches of QE, or nominal GDP targeting: the danger of economic actors assuming that the authorities have no recourse other than to allow inflation to reduce the value of debt is not one that I, nor, I believe, the country, can live with. Instead, I have instructed the Governor and the MPC to resume their erstwhile remit of containing the rate of consumer price inflation as their prime indicator, and to take such actions as are necessary, including raising interest rates if need be, to keep consumer price inflation within a 1.25%-1.75% range.
I intend to make a start today on moving to a tax regime more conducive to entrepreneurship and enterprise, reducing the overall burden of the state on the economy, and ensuring that employers and employees keep more of what they earn. Wealth, Mr Speaker, is not created by Government: money should, in the words of a predecessor of my Rt Hon Friend the Prime Minister “be left to fructify in the pockets of the people”. The tax regime also needs to be simpler: SMEs are the engine of job creation, and the proprietor of a flourishing young enterprise cannot be expected to wade through 10,000+ pages of tax code.
Rt Hon and Hon Members opposite and to my right may wish that this was not so, but the fact is that business in the globalised 21st century locates where costs are minimised and returns maximized. I have therefore decided to reduce Corporation Tax, with immediate effect, to a rate of 15% of taxable profits up to £0.5m and 20% of taxable profits above £0.5m for the year 2013-14, with the intention that these rates shall fall further in 2014-15 and 2015-16, so as to give Britain one of the lowest rates of Corporation Tax in the world.
So-called Green taxes have proved for some years to be a major burden on and contributor to, both employer-firms’ and domestic consumers’ energy costs. Even if they had the intended effect of lowering Britain’s CO2 emissions, which is itself of doubtful value, since too-high costs merely drive emitting activities elsewhere with no net CO2 emission saving globally, they would still represent a disproportionate burden compared to the benefit they allegedly confer. I have however become convinced that Britain’s anthropogenic CO2 emissions play no significant climatic role compared with such elements as the sun and ocean currents, and that, consequently, any taxes levied for Green aims can no longer be justified.
Air Passenger Duty will therefore be scrapped from 1st May 2013, the delay in introduction being merely to give airlines with bookings already made time to adjust booking systems and make any refunds necessary. I can also announce, with effect from midnight tonight, an immediate cut in fuel duty of 20p per litre, to be followed by a further 15p per litre cut from 1st April 2014: with road transport in Britain being the dominant mode of personal transport and retail distribution, adding to inflation through imposing on road transport additional costs via environmentally unnecessary Green taxes on fuel is not something I am prepared to tolerate any longer.
On the subject of Green taxes, I turn now to power generation. The Renewables Obligation and subsidies for renewable energy have in fact represented an indulgence of in some cases egregious rent-seeking, all too often paid by hard-pressed consumers through domestic energy bills. I therefore announce, with effect from 1st May, an immediate cessation of all subsidies of any form to Green energy generation. I expect domestic energy bills to feel the effect of this from the next billing period thereafter.
It will be obvious to Rt Hon and Hon Members that public spending will need to be substantially cut back to admit the above, and other, tax reductions. I have concluded that some departmental budgets quite simply cannot be sustained philosophically while the British people are recovering from the effects of prolonged downturn.
I announce now that the Overseas Aid budget will be trimmed from its present level of 0.7% of GDP to 0.1% for the foreseeable future. The Millenium Development Goals, the source of the 0.7% parameter, were drafted in what were, economically, much happier times, and I cannot ask the British taxpayer to shoulder increased burdens while funds are dispensed to countries which in some instances are not noticeably worse off fiscally than Britain.Furthermore, the budgets of the Education and Health Departments have been ring-fenced since the inception of the present Administration. As unhappy events in the NHS have reminded us, ring-fenced protection from universal financial exigencies has been no guarantee of maintaining superior quality of care or service, and I therefore announce an immediate 5% reduction in the departmental budgets of each function for Fiscal 2013-14, to be followed by a further 5% reduction in each of the ensuing years.
In general public expenditure, Rt Hon and Hon Members will be aware that average public sector pay rose by 2% in nominal terms last year, compared with 1.3% in the private sector. Public sector employees will be only too aware that the pension arrangements which they enjoy, even after the modifications which are currently in train, remain uncharacteristically generous with the norm and have a discrete monetary value. This will, I hope, mitigate the effect of what I now announce to be a pay freeze in both real and nominal terms across the public sector in jobs with a base salary of up to £50,000 pa, with 5% cut in those between base salaries of £50,000 to £100,000, and a 10% cut applying to base salaries above the latter figure.
Finally, Mr Speaker, I am acutely aware that the programme I have outlined today is diametrically at variance with the tenor of the policies we have pursued for the last three years. In an ideal world, such measures would not be so necessary. It is not, however, an ideal world that confronts us today, and I commend this Statement to the House.