I was listening to the radio on the way into central Birmingham the other day when I heard the budget described to me as 'a list of things that the government is going to spend your money on'. I liked this description because it made clear that the government only has any money because we agree to pay it taxes. The government needs us to pay taxes otherwise it would go broke, much as a shop goes bust if people stop buying things from it.
Think of the government and the state as a board of directors of a company. The board decides how its revenues (taxes) are spent. The directors might decide to put some extra cash into its failing healthcare business (the NHS). They might also consider offering new services to their customers, such as providing childcare to single mothers or constructing nuclear submarines to protect our borders. Hostile takeovers might also be an option: the board directors see a competitor, for example, in schooling or car manufacturing, and decides to buy it (nationalisation).
The directors also have another option to raise revenues that doesn't involve raising prices (taxes) for their customers (the citizens). The directors can decide to borrow money from the banks. In the same way that a company can get a loan from a bank to fund a new business venture, a government can do the same thing to fund a new hospital or an ill-advised invasion of a Middle Eastern country.
The loan has to be repaid at some point, usually with the extra money this new venture will bring in. If successful, more dosh will enter the coffers of the company as customers spend extra money on the new product or offering. The same goes for the government. A new hospital means healthier citizens, which means they can work more, which means they pay more taxes. Alternatively an invasion of a Middle Eastern country can mean lots of cheap oil and/or less chance of a nuclear bomb being lobbed at London. This means citizens will spend less dosh on fuel and more dosh on other things. Furthermore there will be less irradiated citizens in the new hospital due to a lower likelihood of a nuclear holocaust taking place, which means they can work more, which means they pay more taxes.
In this context, the Chancellor's budget can be seen as a sort of meeting with the shareholders of the company. Osborne gives an overview of the country's finances, an explanation of how he plans to put the finances back on track and also which ventures he plans to continue funding and which he wants to cancel.
On this basis, if the Chancellor were the chief executive of a company and the budget were a description of a company's finances, the shareholders of this company would immediately sell their stocks in the UK. The country is pretty much bankrupt. The money coming in from the taxpayer is dwindling and the money the state borrows is unsustainable. If the UK were a company, insolvency proceedings would have long been initiated.
So what did Mr Osborne say instead?
The headline offering is yet another initiative to support first and second time house buyers with taxpayer dosh. The 'Help to Buy' scheme is the latest in a long line of ill-fated government policies to give the average man on the street the impression they can afford a house.
But hang on a minute. Was it not a property bubble in the US that caused this whole mess in the first place? In what reality does it make sense for taxpayer money to be spent supporting middle class graduates getting on the housing ladder? The logic seems to be that if more people can buy houses, more houses will be built, which will mean the economy will grow. I don't know about you, but it seems slightly bizarre to pin our hopes on a housing boom to get us out of the recession.
The other headline ideas involved buying more votes from traditionally Labour-supporting beer drinkers and drivers by taxing fuel and pints less. For the sophisticated wine drinkers of Islington, no such luck, but they tend to vote Tory or Lib Dem anyway, so less of an issue there. And those poor nicotine addicts will be squeezed a bit more as usual. The other idea is to do some more road building because apparently if we can drive faster to our destination, then that will also mean the end of the recession.
To my mind, the most astonishing proposal in the budget is to give the Bank of England to do even more than it already is. The Bank will be able to continue giving the state money until the economy starts growing again, which might be never. To return to the 'state as indebted country' analogy, the Bank of England is a sort of credit card with no credit limit and no requirement to pay anything back. I would love to have this sort of credit card.
What Osborne in effect said in his budget is that he has no idea how to get the economy going again except by helping people buy houses they can't afford. Instead he has outsourced his responsibilities to the Bank of England, which is, let's not forget, unelected. The Bank of England will continue printing money via its quantitative easing programme until the unicorn of growth returns.
We, the shareholders, can fire our board of directors if we think they've done a bad job. Unfortunately the alternative bosses, i.e. Labour, seem intent on doing exactly the same as the current board. We, the shareholders, can't fire the Bank of England. Given that the Bank of England is now in charge of getting the economy going again, this seems a bit concerning. I'm not so convinced we, the shareholders, have any say in the matter anymore.Suggest a correction