Britain's experiment with "expansionary austerity" has failed, I argue in an article for Bloomberg.
Criticism of David Cameron's government from Labour and its allies on the left is overdone. The fiscal tightening after 2010 wasn't as sudden or severe as they say. Cameron invited this line of attack by portraying his change of policy as brave and radical. Britain still has a big budget deficit and rising public debt. The Tories are right that longer-term fiscal consolidation is necessary: Public debt cannot rise without limit, even for a country that can print its own currency. And it's not easy for a government to commit itself credibly to "austerity tomorrow" without making some kind of down payment.
Nonetheless, a milder and longer-delayed fiscal adjustment than the one Cameron and Osborne devised was possible, and would have been smarter. A less boastful presentation of the policy when the Tories took office would have made later midcourse correction easier, and it would have been less apt to steer policy toward private financing of public investment and other fiscal absurdities. British governments have a lot of flexibility in their conduct of fiscal policy. They should conserve it, so they have it when they need it.
I wrote the column before Wednesday's budget but the press had been thoroughly briefed on the Treasury's plans (it wasn't like that when I was a civil servant) so there were no real surprises. Today the Tories are getting hammered for their plans to cut the top rate of tax while holding constant in nominal terms (ie, reducing in real terms) the preferential income-tax exemption for pensioners. I never understood why pensioners should get a higher tax allowance than workers, so I don't share in the nearly universal horror over this--though I can see the timing was bad and the politics clumsy.
Chancellor Osborne explained the pension change as an effort to simplify the system. He tried, after a fashion, to make simplification an official theme of Budget 2012. British budgets always need at least one theme: a Budget for Jobs, a Budget for Enterprise, a Budget for Insomniacs, whatever. But if you read his speech (I can't recommend it) you'll see that every simplification was matched by at least one new complication. This too is traditional. To give you a flavor, here's one simplification I particularly enjoyed. It suggests there's a bit more work to do on this front.
We will also address some of the loopholes and anomalies in our VAT system...
Hot takeaway food on high streets has been charged VAT for more than twenty years; but some new hot takeaway products in supermarkets are not.
He means "not subject to VAT", rather than "not hot". Though sometimes they might not be as hot as they should be, a separate issue. The Daily Telegraph has a fuller report.
Currently, most hot takeaway food such as meals bought from a restaurant or fish and chip shop are subject to VAT. However, a small number of items have managed to avoid the tax, including rotisserie chickens sold in supermarkets and sausage rolls and hot bakes sold by some outlets, notably Greggs.
In the Budget it was announced that: "VAT will also apply, to the extent that it does not already do so, to the sale of hot food, cold food consumed on the supplier's premises, sports drinks and holiday caravans, and to the rental of hairdressers' chairs. This will have effect from 1 October 2012."
Greggs, which has more outlets in Britain than any other takeaway company, sells 140m sausage rolls every year. It has successfully argued - following a lengthy and complex VAT tribunal - that the products are baked in store, and just happen to be hot. As a result its hot pastry products have been free of VAT.
A source at the Treasury said: "We want to remove all these anomalies. This is a big step towards simplifying the VAT system." They added that anything that a normal consumer would consider hot, would be deemed by the Treasury to be so and subject to the tax. Most tax experts believe the definition of "hot" is above room temperature.
Well, I think that depends on which tax experts you speak to. Anyone can see that a cold pastry product should be free of tax, regardless of whether it had been hot at some stage. The question is whether a sausage roll at a temperature somewhere between warm and tepid--and, moreover, cooling as we debate the issue--should receive preferential treatment. The Tories say no. Labour calls that an outrage, and I'm inclined to agree. As for the rental of hairdressers' chairs, don't get me started.
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