Budget 2013 review
A couple of weeks ago, George Osborne announced another anthology of essays on how to further damage the UK economy - known in Treasury jargon as 'a budget'. You can view the full details on the HM Treasury website, and I have extracted and commented on some of the more prominent measures below.
More cuts to corporation tax
Twenty one percent was still too high for the Chancellor, so he is going to cut corporation tax by another percentage point on top of those already announced. The problem is that Osborne seems to think that tax is the only competitive advantage that businesses care about. After the reduction to 20%, we will be on a par with Russia and Saudi Arabia. When was the last time you heard of a large multinational choosing to move to either of these countries for tax reasons? Even BP, which would have other potential reasons to move to Russia (e.g. the amount of oil and gas extracted there), has kept its headquarters in London.
What Osborne fails to realise is that the UK has many advantages which counterbalance any disparity in corporation tax. The English language, well established legal system, relatively low corruption, central timezone, liquid stockmarket and well educated labour pool all more than compensate than for a couple of percentage points in tax.
The other daft reasoning behind this idea is the data - Osborne claims this cut will mean the UK has the joint lowest rate of tax in the G20. This doesn't include the Republic of Ireland, which has a much lower rate, and several large technology companies - including Facebook, Google and Microsoft - have their European headquarters there. If Osborne thinks that corporation tax is the key issue, why does he not cut the rate to match the RoI?
Finally, if your business is struggling to make ends meet, a cut to corporation tax will not help in the slightest. Generally speaking, companies are only taxed on their profits, so any company which is breaking even or making a loss will see no benefit from this change.
Help (sort of) with housing
Want to buy a house, but struggling to raise a deposit? Don't despair, the Chancellor is here to help! Of course, there are catches involved. Most of the help is reserved for people who want to buy new build properties, where the Government will take a punt on house prices by giving you an equity loan of up to 20% of the price. If you sell at a loss, the Government will also take a hit - although this will of course never happen because we all know that house prices only go upwards.
The qualifying period for Right to Buy has also been reduced, from five years to three. Whilst I'm sure this will generate positive headlines in the Mail and the Telegraph, there is no mention of any funds to replace any housing stock sold in this way. All this policy does is reduce the housing stock available for social tenants - thus increasing the waiting lists. Right to Buy worked for Thatcher as an electoral gimmick - and in that sense it was a masterstroke - but we have seen the long term consequences of that policy, and they do not bode well for the generation that follows any sell-off of social housing.
The time has come for some direct intervention in the housing market. The total support in the budget for housing is supposedly £5.4bn. At current prices, that would allow the Government to buy at least one - and possibly two - of the big house builders quoted on the London Stock Exchange.[note Taylor Wimpey (£2.9bn), Barratt Developments (£2.8bn), Persimmon (£3.4bn) and Bovis Homes (£985m)] Effectively, they would be nationalised, though shareholders would be compensated in full - as if the buyout was a normal corporate takeover. With these assets under state control, the Treasury could direct new houses to be built in areas of need, as opposed to where they would fetch the highest prices. The profit margin usually earned by these companies could instead be used to reduce the price of the houses - selling them more or less at build cost - hopefully making them affordable for first time buyers.
Overall, this was less of a bungle than last year - though that was hardly a challenge. However, Osborne is still bumbling around and showing no signs of having a grip on the economy. In the absence of a steering wheel, he's decided to put his foot down and continue even faster on the current course. Will he run out of road before he runs out of petrol, or will Cameron put someone else in the driving seat?