Budget 2009

On Wednesday Alistair Darling delivered what was a fairly dramatic budget when compared to recent years. Dramatic because of the forecasts it contained about borrowing and debt, and because of how these forecasts and the response of the government to the recession have been debated by the main political parties in the days since.

As always, the budget provided updated assessments and forecasts of the economy and public finances. In a time of great uncertainty, the Chancellor’s medium term forecasts (growth of 1.25% in 2010 and 3.5% annually from 2011) were viewed by most to be at the optimistic end of the spectrum of plausible futures. In contrast, his forecasts for the rest of this year (GDP falling by 3.5% in 2009) were fairly gloomy – the worst recession since the Second World War. For more, see this powerpoint presentation from the IFS, which details the public finance projections.

Labour’s response to the recession is continued investment, although at a much lower rate of growth than in previous years. Public spending is clearly going to be under pressure with public spending growth to be cut from 1.1% next year to 0.7% from 2011-2012. Efficiency and value for money are set to become even more important as the budget raises the 2007 Comprehensive Spending Review savings target from £30 billion to £35 billion, and in the next Spending Review period, outlines additional efficiencies rising to £9 billion by 2013-14. The squeeze on spending will affect different areas of public spending in different ways (see this driver on how levels of public spending will affect the VCS.) This power point presentation from the IFS details their public spending projections.

Dramatic borrowing will be required to balance the budget and many have been quick to point out that a British peace-time government has never before planned to borrow so much. Public borrowing is to increase to £175bn this year, peaking at 12.4% of GDP in 2009-10 (followed by levels of £173bn, £140bn, £118bn and £97bn in years after).

What has the budget done to political debate running up to the election? Most commentators agree that the Conservatives are currently favourites to win the next election, and the budget has not changed that. However, the budget, and the response of the Conservatives has confirmed a greater divide between the parties with Labour arguing that continued investment is crucial to bring the country out of recession, and the Conservatives arguing that the priority is to address the high levels of debt and reduce government borrowing through a ‘return to traditional public spending control’ and ‘a new culture of thrift in government’. What is clear is that it will take many years for whichever party is in power to turn the economy around, as Robert Chote of the IFS points out:

[W]hoever takes office in the general election after next will still have to find another £45 billion a year in today's money by the end of their parliament to eliminate this deficit, from tax increases and cuts in non-investment spending.

A further dividing line has potentially been set up around the issue of taxation, with Labour announcing an additional rate of income tax of 50% applying to incomes over £150,000 from April 2010. Described by many as a political rather than economic move (because it is argued that it will not increase revenues as those affected will report less income), some have suggested that the move marks the death of New Labour. A populus poll in Friday’s Times reported that the 50p rate is backed by a majority of voters, which may explain why the Conservatives have been careful to say that they would not immediately scrap the plan.

The budget also set out how the government plans to address the negative impacts of the current recession (for full details, see the HM Treasury website) :

  • Unemployment (see labour market): An additional £1.7 billion funding for JobCentre Plus; from January 2010 everyone aged under 25 unemployed for a year to get the offer of a job placement or training; £250m funding to help people get work experience in growth industries; an increase in the level of statutory redundancy pay, from £350 making the weekly rate £380.
  • Low interest rates for savers, which is particularly affecting pensioners:  increase in the annual investment limit for Individual Savings Accounts (ISAs); additional payment alongside the Winter Fuel Payment?
  • The housing market - funding to build more homes through unlocking sites currently sitting as dormant; an extension of the current stamp duty holiday for all houses costing up to £175,000; extra £80m for shared equity mortgage scheme
  • Debt (see consumption culture and personal debt): additional £125 million in 2009-10 and £145 million in 2010-11 for the Social Fund, which provides interest free ‘Budgeting’ and ‘Crisis’ loans for vulnerable people, allowing them to meet and spread the payment of unexpected costs.  

The potential role of the VCS in addressing the recession was not recognised in the budget, as Stuart Etherington, Chief Executive of NCVO highlighted in his response:

Overall it is extremely disappointing that the Chancellor has not looked beyond the conventional solutions offered by the market and the state and has not enabled the voluntary and community sector to play its part in helping to take the country out of recession.

Finally the budget included three announcements of specific interest to the VCS. (For more see NCVO’s summary and reaction

  • A new £20 million Hardship Fund to provide grant support to third sector organisations delivering front-line services to the most vulnerable and disadvantaged in society, that have been affected by the recession.
  • Consultation on design and functions of a Social Investment Wholesale Bank.
  • Research into the effect of redirecting higher-rate gift aid relief from donors to charities.
Last updated at 16:09 Mon 21/Feb/11.
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Katherine's picture

Katherine

Specialist Editor

This budget is troubling, because it offers a short-termist psychological response to recession rather than a rational longer-term answer.

In practice this means a flurry of cliches, with short termist attitudes of battening down the hatches and firefighting taking precedence over the longer-term view. Continued low-level investment in infrastructure (a stitch in time saves nine…) is ignored in favour of expensive emergency interventions . This is most glaring in the real-term drop in infrastructural investment – which will have a noticable effect on the third sector in terms of grant allocation, whilst simultaneously putting more pressure on the sector in terms of increased social need – being countered with the much-trumpeted Hardship Fund.

The one potential positive comes not from the state but the public: with interest rates so low, and depreciating real value of savings a genuine possibility, investment – particularly social or peer-to-peer investment – will seem an increasingly attractive option. And the increasing number of peer-to-peer finance models, particularly online, seem well placed to support this.

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