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. Recently the Tories and their Liberal Democrat coalition partners have given the impression that capitalism is a dirty word and that the City of London, Britain’s greatest industrial cluster, is an embarrassment. This week’s change may be more symbolic than fiscal (the rich will have to pay more in other ways), but symbols matter. At a time when France’s most likely next president wants to introduce a 75% tax and Barack Obama is moaning about millionaires and billionaires, Britain is welcoming entrepreneurs and financiers.
Playing the numbers
Economically, this budget was mainly a piece of micro-fiddling. Mr Osborne made his big fiscal decision in 2010, when he announced a rapid timetable for eliminating Britain’s large structural deficit. He has stuck to the course set out then, which this newspaper broadly supported. The budget was mildly expansionary in the near term, without disturbing Britain’s bond rating (see article).
Not all the microeconomic nudges were to do with business. For instance, Mr Osborne followed through with an earlier pledge to abolish child support for high earners (albeit with some tapering). At a stroke, this demolishes the long tradition of universal benefits, which was intended to secure general support for welfare. But most of the measures seemed to have business in mind. The chancellor accelerated a cut in corporation tax, bringing it down from 26% to 24% this year and to 22% by 2014-15. He also pushed for public-sector workers to be paid the prevailing wage in their region. That would mean lower salaries outside south-east England—a move that should make it easier for private firms to compete for staff.
None of these will be remembered as long as the cut in the top rate of tax. Politically, that is a gamble. It came against the advice of many in the governing coalition. Even a couple of weeks ago many assumed it was unthinkable. Britons kept themselves warm during the winter by raging against highly paid bankers. In the coming year the government’s austerity drive will hit welfare. Labour made hay over the tax cut this week, contrasting it with the new “stealth granny tax”. With even the Tory press in a rage over pensioners, Ed Miliband, Labour’s leader, asked what planet Mr Osborne was on.
A more globalised one than Mr Miliband, evidently. The useful domestic political signal that the 50% tax sent—that the rich must do their part to repair the deficit—was outweighed by its global cost. Stinging high earners encourages financial firms and their employees to leave Britain. The longer-term danger, which is no less acute for being unmeasurable, is that the young financier from Madrid, Manhattan or Mumbai will decide not to come to London in the first place.
As a means of bringing in revenue, the 50% rate was never very efficient. Introduced by Labour in a panicky piece of politicking before the 2010 election, it raised precious little cash in the first year it was in force. This should surprise nobody: rich people react to high taxes by managing their incomes so they pay less. Mr Osborne claims that he will claw back the money, and more besides, through new anti-avoidance measures. Those buying expensive houses via tax-efficient shell companies, for example, will face punitive rates.
As for the politics, they may change. By the 2015 general election, a 45% or even a 40% top rate of income tax is likely to seem part of the economic furniture. Mr Miliband will have to decide whether to leave the rate unchanged and look like a windbag, or try to woo voters as the party of tax increases.
This budget carries a message not just about Britain’s relationship to the world, but also about the nature of its economy. When the government came to power in 2010, the wounds from the financial crisis were still raw. Politicians argued that Britain should try to wean itself off financial services and rediscover honest manufacturing and small- and medium-sized enterprise. Just a year ago, Mr Osborne was talking about a “march of the makers”. It was hoped that Britain would become rather like Germany, but with better restaurants. The rhetoric continues: there was lots of talk this week about helping small business. The budget sends a different signal.
Doing what it does best
Britain is not Germany. Although its manufacturing sector is far from puny, it lacks a Mittelstand churning out high-value machine tools. Nor is it likely soon to develop one. What the country is good at is financial services and luring foreign investment: in short, milking globalisation. While insisting he is doing other things, Mr Osborne has quietly acknowledged Britain’s strengths and doubled down on them.
It is a shame he could not say this. In his budget speech Mr Osborne mentioned financial services only to say that Britain needed other strings to its bow. And it is a shame, too, that other parts of the government’s programme undermine the country’s advantages. It is pursuing an immigration policy that makes it harder for bright people to come to Britain, and plans to withhold settlement and citizenship from many of those it does let in: an awful message. Its policy on Europe is a shambles that has strengthened the forces arrayed against free trade.
Mr Osborne’s budget is nonetheless a big step in the right direction. He has signalled, about as clearly as a man with no money to spare can, that Britain is open for business.
Source: economist
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