Osborne's Budget is what Britain needs

by George Chapman

Politics aside, there would seem to be economic harmony and satisfaction following the Chancellor’s Budget report today. I concede this is partly because many economists had already accurately predicted many of Osbourne’s plans for the year ahead, but also because the man has actually done a good job of acknowledging and satisfying the country’s current economic interests. The focus of the 2012 Budget was always to be the ever-growing national debt following the global recession of 2008, which currently stands at 7.6% of our GDP, predicted to reach a staggering 76.3% by 2015.

The answer to reducing the deficit is, quite logically, to cut spending or to stimulate production known as aggregate demand. Aggregate demand, as the sum of consumer spending, investment by firms, government spending and the balance of UK exports and imports, can be stimulated by boosting one of these factors. As government spending constitutes capital that the government has both borrowed and generated from tax revenue, it would seem that Osbourne’s intention to reduce government borrowing would negate efforts to increase aggregate demand.

Furthermore, his increase of the personal allowance to £9,205 from £7,500 coupled with a reduction in the 50p tax rate to 45% of top earners’ salaries would look to cut opportunity for government spending and consequently aggregate demand tremendously, by seemingly reducing the government’s tax revenues. Thankfully, and I imagine intentionally, this is not so.

In accordance with the Laffer curve, an increase in the percentage level of taxation can in fact have an adverse effect by discouraging the population to work. Thus, by reducing the 50% tax level to 45%, Osbourne could potentially generate higher tax revenues, as there is no mathematical model for the UK economy to dispute this. However, one thing is certain, such a reduction in the level of taxation will, as well as the increase in the personal allowance, provide many with greater disposable income, hence stimulating consumer spending in the aggregate demand summation.

It is not, however, so straight forward. Many have suggested that such tax ‘perks’, as it were, will have little net effect on the economy due to the increases in the levels of duty placed upon cigarettes, alcohol and fuel, as well as the 7% stamp duty to be imposed on those who own houses worth in excess of £2 million. Some have even gone so far as to suggest that the result will be ‘fiscal neutrality’. Meanwhile, one clear advantage to the economy to come from Osbourne’s red briefcase is his vision to double exports within a decade to £1 trillion, as this will be an undeniable boost for aggregate demand. It is his intention to ensure that the UK’s financial services industry remains as much of a cornerstone in our economy as it is today, but to also encourage the emergence of greater scientific industry here within the aeronautical and pharmaceutical markets. The Chancellor insists that his Budget this year will support ‘families’, ‘business’, and ‘aspiration’.

However attractive Osbourne’s policies may appear to the economist on paper, only time will tell if they have been of great benefit in this ever turbulent world economy.