Grim Faces

Quite what Gordon Brown was grinning about and patting Alistair Darling on the shoulder for after perhaps one of the most grim budget speeches since 1945 in terms of the country’s finances is beyond most people. At least our finances back in 1945 were grim for good reason – we had just saved the world by fighting a real war.

Yesterday we heard how Britain was going to try and dig itself out another, far more serious financial situation caused by greed and incompetence to a degree not encountered before in the globe’s history.

The surprising thing was that it seemed to amuse Brown greatly. Personally, I would be holding my head in shame.

The budget was undermined by an inability to add up. Less than a few months ago, the PM and his sidekick were telling us confidently that the economy would not shrink by a certain amount and therefore borrowing would not need to be so high. Yesterday we heard that he and Darling had got the numbers wrong – the economy would decline by 3.5% this year before picking up by 1.25% next year and because of lower tax revenues due to higher unemployment, the borrowing would be significantly higher than anticipated before. Even before he had finished saying it, the IMF roundly contradicted him saying the economy would decline by over 4% this year and a further 0.4% next year and so borrowing requirements would be higher than he had predicted in his speech. The IMF, to be fair, has called the UK numbers far more accurately than our own Ministers.

It was ‘Wishful Thinking’ again from Darling who looked increasingly alarmed about the numbers as he mentioned them, as if by actually articulating them it was the first time he had noticed quite how disastrous our position actually is. The problem with wishful thinking, as we know in business, is that inevitably it leads to assumptions upon which wrong decisions are made. For us, it will be the amount of future tax we all pay – it’s that fundamental.

Class Wars

One of the least unexpected features of the speech was that the highest rate of tax has now been set at 50% on earnings above £150,000 which means, with the removal of the personal allowance for earnings above £100,000, that the effective top rate of tax is 60%. Labour has reverted back to the party of taxing higher earners but not the super-rich who can afford to evade this. It was, of course, a tactical move designed to elicit some sympathy from the public.

However, the greater amount of tax would be raised from the additional duties on tobacco, alcohol and fuel. A great proportion of the population consume these products and probably as much as any rich person, which means that lower paid people are getting taxed disproportionately more compared to their earnings. This has been a tactic of this Government since its birth and once again, the soundbite was designed to divert attention from the real menace of the budget – we will all pay more tax.

As unemployment topped 2.1m yesterday and the burden on the welfare state rose again, it is very clear that our situation is getting far worse. In short order, Britain will be borrowing around £1.4 trillion or over 70% of a falling GDP – an additional liability of £23,000 per head of population in Britain, which of course excludes non-domiciles. Whether we believe Darling or the IMF, we are pretty much up the creek without a paddle.

‘Grow Out of a Recession, Not Cut’

Darling’s little snippet may well be his epitaph. How much longer he has to endure the pain of being Chancellor might be mercifully short if he continues to bungle but if he’s unlucky he might have to hang on until the next election and ensure his team loses – a subject on which he is making good progress. Surely, he cannot be enjoying being made to look such an idiot each day.

Meanwhile, the Bank of England Monetary Policy are encouraged that there are signs that the policy of putting new money into the economy is working, the £75bn set aside for buying Gilts is apparently showing signs of effect. The good news is that there will not be any shortage of Gilts to buy as over £225bn of them will be sold in the near future, a very grim reminder of the additional debt the country is taking on. Last month saw the first failure in the Gilt auctions since 1995 and for just a second there it seemed that the whole darn policy had hit a brick wall. External investors had basically shunned us, fearing that Britain did not have the ability to service that debt and there were fears of a down-grading in our credit status globally. That drama has yet to fully unfold and over the course of the next few months, Mervyn King and Gordon Brown will need to attend Tony Blair’s Faith Tour to get the strength to pray enough that the auctions do not fail again.

While the theme was to borrow more to invest and we got a few snippets of how that may be in terms of increases in bad debt insurance, help for the unemployed young and a few other things, in fact, the majority of the budget was how efficiencies were to be achieved and taxes would rise. Wales alone is set to see over £400m chopped off its budget and there were concerns that Health and Education would suffer. Perhaps the Assembly Politicians should have thought of all this before creating so many Politicians on fat salaries, expense accounts and rock solid pensions in their swanky new building beforehand but at least if they scrapped the Assembly now we could salvage some savings for the future. Policies at the start of the Labour Terms are now coming back to haunt them and this is one – layers of Government with no power clogging decision making channels and creating new talking shops in new offices, draining valuable resources - was one of the worst.

There are many, many ways in which this country could save cost and divert the money into better spend and this should have been the theme. Instead, it’s all about draining resources on key things in favour of propping up a failed and flawed bank system. Investment in the right areas should be the priority.

Britain Post 2010

While we are being focused on the here and now by the Government, our future looks very bleak. There is no point in toiling hard and trying to get salary increases only to see most of it absorbed in new taxes while the relief on pension savings is being scrapped at the higher end so we cannot provide enough for our retirement.

Tax bills will rise dramatically and what we heard yesterday was only the start of what will be many calls on us for more money. They say two things are certain in life, death and taxes. Yesterday was the first step of the biggest certainty we will all face – taxes will rise dramatically over the next 20 years regardless of who is in Government. Just as the last Labour regime left the country in a dreadful state that took the policies of Margaret Thatcher to solve, it will be someone else’s problem for the future and it will take some solving.

Of course, one of the lasting Blair legacies was to be the 2012 Olympics. I love the Olympics but I have always had a problem with the obsession by countries of holding them which seems to attract politicians like moths to a light. This Olympics now looks as if it will be more of a millstone than a legacy and already there are rumours of cuts in venues as budgets continue to overrun.

As with Assemblies, legacies are to be earned not paid for and the Olympics is in severe danger of becoming one of another Labour’s major follies.