Where is the Budget for recovery?

I have written this post for the Public Finance blog on today's Budget:

So much of today’s Budget was pre-trailed – the VAT rise to 20%, the increase in capital gains tax, a public sector pay freeze, lower income tax bills for the lowest paid, eye-watering public sector cuts – that one might have expected to have seen an imaginative approach to economic recovery to compensate. Labour’s argument that the widespread cuts already announced could have a negative effect on jobs and the recovery needed to be answered. And George Osborne failed to provide an adequate response.

A modest cut in corporation tax still leaves UK rates much higher than those in Ireland, a country that has taken even harsher measures in cutting its deficit. There was nothing in the Budget to promote innovation or higher level skills – the ‘technician skills’ that are needed to provide growth and compete with the fast-growing Asian economies. The measures for small firms sounded unappetising, and as complex as in any Gordon Brown Budget. The Tories show no recognition of the interdependence of the private and public sectors, and the effect on small services businesses of big public sector cuts. Scrapping tax relief for the video games industry seems bizarre, and could affect growth in a highly innovative British success story. However, there will be relief that capital investment is not further to be reduced, particularly in schools anxiously awaiting the results of a review into Building Schools for the Future, though the level at which it is being frozen was artificially reduced as a result of forward spending on the stimulus. And there is no indication – as benefits are cut by £11bn – of any replacement for Labour’s youth jobs programmes that were cut last week.

With 25% real terms cuts in unprotected departments, there were no guarantees on education spending, even as health and aid spending were ring-fenced, which will mean a tough summer of negotiation for both the Department for Education and the Department for Business, Innovation and Skills. Osborne did indicate, however, that education and defence would not be treated as harshly as other departments.

Schools will be hoping that the promised pupil premium provides some cushioning, and it will be hard to reduce frontline spending in schools, 16-19 colleges or Sure Start without causing a huge outcry, though the Treasury may argue against real-term rises with a two-year pay freeze and a future increase in staff pension contributions. Universities are likely to have to charge higher fees after the Browne review, and cuts in adult skills spending in colleges are already under way. Other big areas of spending like education maintenance allowances and children’s and youth services face possible deep cuts too.

Politically, George Osborne delivered confidently and Harriet Harman gave a sharp and well-judged response. But it is the Liberal Democrats who look most exposed over the details, particularly the VAT increase after their denunciation of the Tories’ VAT ‘bombshell’ before the election. While they may argue that they achieved some of their income tax and CGT plans – and the removal of the cider levy for their West MPs – voters are unlikely to see these as mitigating the wider impact on public services and the working poor. There were clever touches – pension pledges and an uprating of child credit – but they are unlikely to protect the party from the anger of a significant proportion of their electorate who believe this is not what they thought they were voting for. Talk of an international ‘consensus’ – not shared by Barack Obama in the US – may not be enough to win them back.