The dynamic and static analysis of the impact of the Budget

If you’re still with me, I’m referring to the report today by the IFS which is saying that the last Government Budget was “regressive”. However, the government (of which my party is part of) are arguing that the budget is “progressive” and the analysis by the IFS was “impartial”.

So who’s right?

Actually – as in statistics, both are.

The IFS is right to point out that there are benefit cuts and housing rule changes which will have a bigger impact for low income families, especially if they don’t work. They are also looking at the full impact up to 2014.

The Treasury’s work is looking only at the impact up to 2012, but more importantly it includes the dynamic impact of tax changes (increased income tax allowance, economic growth) to change the poverty trap so it makes it more worthwhile for those not working to work, which will improve income.

So comparing the two analysis is rather like comparing apples with pears. The IFS doesn’t assume any dynamic changes  and is over a longer period, but the Treasury does assume dynamic changes and over a shorter time frame.

For my previous comments on the Budget click here

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What would I / the Liberal Democrats have done differently with the Budget?

An emergency budget for tough times. Overall, although I was uncomfortable with some of the budget announcements there were few things in there I didn’t expect or which Labour would have done vastly differently. Cuts are needed, although timing is always questionable and to some degree it has been driven by the financial markets / ratings agencies (yes the same ones which thought Lehman Brothers was sound…).

I won’t cover what’s in there and how the Liberal Democrats have managed to get a few of our policies in the budget announcements, but rather to highlight the distinction between my party and the Conservatives I want to highlight what I would have done differently: 

  • I’m still uncomfortable with the £6bn cuts this year, given the need for public demand to fill the lack of private sector demand, this is a concern shared by the US, fuelled by the 1930s depression and the problems faced by Japan since the 1990s.
  • I would have kept child benefits rising year on year, but I would have withdrawn it from better off families via taxing of the benefit.
  • Invested more in capital projects such as green technology to kickstart the growth in the private sector which the Government is relying on.
  • Announced the renewal of trident to be included in the Strategic Defence Review to understand the potential for cost reduction.
  • Examined the case for road pricing along with investment in public transport (have the environmental costs fully accounted for).
  • Although I don’t want council tax increases, I would allow local authorities the ability to increase council tax if it’s needed to protect local services, many of the cuts will be at the local level due to tight budgets.
  • Look to increase the incentives to work via a greater personal allowance rather than just cutting back on benefits.
  • Not enforced the rule stating single parents must work when their child begins school, too broad brush and ignores the poverty trap.
  • Remove the winter fuel payments for pensioners.