Budget 2012: A big debate about small numbers

Here's the best news about tomorrow's UK budget: it's not going to be about the big numbers.

Here's the bad news: it's going to revolve instead around whether George Osborne is cutting taxes on Britain's highest earners.

Why is that bad news? Because it's a question that may well be all but impossible to answer on the day.

If all goes as expected, the chancellor will replace one, possibly not very effective, tax on high earners with a collection of other taxes on the rich, whose effectiveness will be even more difficult to judge. It will not be an easy one to call.

A quick reminder where we stand on the big numbers, before returning to the small ones, that may cause so much pain tomorrow.

Lest we forget, the UK economy and the public finances are still in a horrible state. At the time of the pre-Budget report the OBR forecast Britain's national output would expand by just 0.7% in 2012. Only a year ago, it thought we would grow by 2.5%. And even that was not so hot, for an economy recovering from the steepest recession since the 1920s.

But as far as Mr Osborne is concerned, the bad news is also old news. The economic outlook hasn't got any bleaker since November. And when it comes this year's borrowing numbers, the picture is even looking a bit brighter.

Image copyright Getty Images
Image caption Which tax will Chancellor George Osborne cut?

Shadow Chancellor Ed Balls always says the government is "cutting too far, too fast." That's up for debate. But what does seem to be true is that government departments and local authorities have cut further, and faster since last spring than Mr Osborne asked them to.

In the first 10 months of the financial year, central government current spending fell by 1.2%, year on year. Over the full year, the plan had been for spending to rise by almost the same amount (which would still have meant a real terms cut.).

In the same 10 months, borrowing by local governments rose by £1.2bn, relative to a year earlier. That sounds bad. But Mr Osborne was actually expecting their borrowing to rise by nearly £8bn over the course of the year.

The upshot is that, even with some "catch-up" spending in the last month or two, government borrowing for 2011-12 is likely to come in at least £3bn to £5bn below the OBR forecast for 2011-12 of £127bn.

City economists are divided as to whether this reflects a lasting improvement in the public finances, or a one-off. But the message from the Treasury is that Mr Osborne is not assuming this will last.

Fitch, the ratings agency, helpfully made the chancellor's point for him last week when it put the UK's AAA rating on negative watch. If Mr Osborne still has his heart set on preserving the country's top rating - and he apparently does - he will not see this modest reduction in borrowing as a reason to ease up.

So, for the first time since 2008, the "big" issues in tomorrow's Budget will be politically explosive, but in economic terms, very small beer indeed.

We seem destined to be talking about: lowering the top rate of tax from 50p to 45p; a clampdown on tax avoidance by the very richest, including the purchasers of expensive UK property; not removing child benefit from certain relatively well-off households, and an increase in the standard personal allowance.

Of these, only the last - an increase of the personal allowance - affects the majority of taxpayers and potentially involves a lot of money. That is why we have to assume he will not raise it by very much.

The personal allowance is already going up by £630 this year, £210 higher than if it were simply being indexed to inflation. To raise it to £10,000, as the Liberal Democrats have said they ultimately want to do, would cost around £9bn in 2012-13. Even raising it by another £200 in 2012-13 would cost nearly a billion.

Assume we have some modest further increase in the tax allowance. The question of the hour, when Mr Osborne sits down tomorrow, will be how this modest giveaway to Britain's "hard-working households" compares with any change in taxes for the top one per cent.

This is when we would usually want to refer to one of those nice charts, showing how tax - and benefit - changes are likely to affect households at different parts of the income scale.

The problem is that, as F Scott Fitzgerald might have said, the top one per cent are different from you and me. And one of the things that's different about them is that they don't fit neatly into distributional charts. Not least, because their income tends to be a small and highly 'flexible' proportion of their wealth.

Assume, as many now expect, that Mr Osborne announces a phased reduction in the top rate of income tax from 50p to 45p, starting in April 2013. Assume, also, that the report into the top rate suggests that the tax is raising less than expected - say, £750m.

On its own, that would sound like a tax break for the rich - albeit a very small one. (Remember, income tax alone will raise £160bn this year.) So Mr Osborne is also likely to throw in the "tycoon tax" - a long list of anti-avoidance measures targeted at the very rich, which he may say are "paying" for that increase in the personal allowance.

It will be difficult to say there's been a big tax cut for the rich, if the tax that is being cut was not actually raising any money - though expect there to be plenty of argument over that report.

But the claim that the richest are paying more will also be rather tricky to prove. After all, chancellors always say they are going to close loopholes and cut down on avoidance - Mr Osborne promised to raise a billion with such measures only a year ago. We'll never know exactly how that turned out, either.

It's not that the forecasts are dishonest. It's just that, to put it bluntly, the money all looks the same when it comes in. The wealthy entrepreneur doesn't usually attach a note saying that he usually manages not to pay much tax but this year he'd been forced to cough up.

Perhaps tomorrow will be different. It will all be clear and easy to prove. But it's difficult to see how.

If Mr Osborne has his way, a budget for jammy dodgers will miraculously turn into a budget fit for Robin Hood. But good luck to the man - or woman - who has to establish whether the chancellor's numbers "add up".