Budget 2010: A game of give and take

Is this Budget going to be a serious economic document, or is it all just bullshit? Gina Dyer wades through the mess so far and offers her opinion.

Given that’s it’s taking place a mere hop, skip and a couple of months away from a general election, this Budget is widely expected to be very high in political content and low in what we might call ‘fibre’ – ie actual fiscal policy that’s expected to feed the economy.

The Institute of Fiscal Studies this week released a paper discussing the correlation between taxes and elections, using historical examples to illustrate the process of give and take that usually happens when these events are interlinked – namely the ‘giving’ that occurs before the election, and the ‘taking’ that happens afterwards.

We’ll discuss this more in a moment, but first here’s a clip from Penn & Teller’s ‘Bullshit’ series, which illustrates how taxes and wealth distribution works in the US. Look familiar?

Last week, Alistair Darling told us not to expect any giveaways in next week’s Budget, but in the same week, chief Treasury secretary Liam Byrne assured the British public that there would be no further tax increases  (including the widely speculated increase in VAT to 20%) if Labour wins the election.

Is he serious? How on earth is the government going to be able to halve its £178bn deficit in the next four years without a few tax increases? How does that saying go – ‘no pain, no gain’? Where’s the pain, people?! At the moment it looks like one of those cartoon anvils that’s nowhere to be seen until the last minute – when it hits you in the face.

If Darling and Byrne’s claims are borne out over the next few months, it would break a well established pattern of huge giveaways right before the election and a series of ‘take aways’ immediately after, says the IFS.

The Conservatives did it in 1992 (then chancellor Norman Lamont later said that his pre-election Budget was “not very good…but it did help us to win the 1992 election” and that his next Budget “helped to lose the 1997 election…but it was definitely my best budget”).

The IFS report continues: “Like the Conservatives after 1992, Labour has tended to announce relatively big net tax increases in the months following its general election victories. This can be seen in the Budgets of July 1997, March 1998, April 2002 and the PBR of 2005. We have also seen relatively large tax increases announced since the outbreak of the recent financial crisis (PBR 2008, Budget 2009 and PBR 2009). But with the exception of the increases in income tax from April 2010, which will only directly affect one adult in 50 (those fortunate enough to have an income above £100,000 a year), most of the pain will not be felt until after the 2010 general election.

“It is possible that we won’t see further net tax rises after the 2010 general election. But recent history suggests we will,” said the IFS.

In short, watch out for that anvil everyone - and maybe invest in a safety helmet if you can afford it.

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