My main impression was that this was a budget to shore up business. Let's deal immediately with the temporary cut in VAT from 17.5% to 15%, which will cost circa £12bn. Tories are saying "this won't make any difference". They sincerely believe that releasing £12bn into the economy will have no effect and this reflects their lack of understanding of how business works (possibly because their leadership comes from the aristocracy rather than the commercial community).
Here's why it will make a difference. In the current tough retail climate, retailers are slashing prices - for example the M&S 20% discount sale. When retailers slash prices, they are in effect slashing their margins. But there is a limit as to how low they can slash. If the price the consumer is demanding is below the break-even price for the retailer, the retailer has only a few options. They can try to cut costs such as heads of staff - which will increase unemployment, and which has the effect of scaring other consumers, fearful for their own jobs, into spending less. They can try to cut the price below break-even to grab market share and force their weaker competitors to try to match them and take losses in the hopes of forcing them out of business (job losses again), which then opens up room to raise prices again. Or they can try to hold prices at break-even and hope that their competitors who are discounting cannot sustain the discounts for long, and either go bust (job losses) or raise prices to above break-even again.
Therefore doing nothing leads to job losses. VAT represents a cost to business. So the 2.5% cut means that they should be able to maintain small margins even while discounting, and hence forstall the need to cut costs through letting employees go. That's why the retail industry has welcomed todays move. The main point about this is to help businesses maintain trading and thus safeguard employment.
The Tory opposition to the £12bn cut is also incoherant - if we had raised VAT by £12bn they would have made no end of fuss. But if it makes no difference one way it should make no difference the other way!
The govt has also deferred the small business corporation tax increase, and let struggling businesses spread the amount they owe the Inland Revenue, which should make a huge difference to cashflow. As any small business knows, the Inland Revenue is the scariest of creditors and it is usually not being able to pay the Revenue that precipitates firms going into bankruptcy. The additional help to small business will be worth £7bn.
What about boosts to the consumer, I hear you ask. This will come from monetary policy. The 1.5% cut in the base rate has been passed on by most lenders (apart from HSBC), and will hit people on the standard variable rate or trackers in Dec. It's worth about £100 a month. The BoE will undoubtedly cut rates again in Dec, and going forward.
So you see a two-pronged attack - putting money into pockets via monetary policy and shoring business up (and hence employment) via fiscal policy.
With regard to the tax rise for those earning over £150k - the cover for doing this comes from the election of President Obama. I wrote the following on 5th November:
Obama has stated that he thinks a person on an income of $250k is rich (this is about £158k). He intends to raise the top federal tax rates to to 36% and 39.6% (from the current 33% and 35%). Remember that Americans pay state income tax in addition to federal income tax. The American state that mirrors Britain's economy most is New York State. There, the state income tax if your income range is between $100,001 and $500,000, is 7.375%. If your income range is $500,001 and over, your tax rate is 7.7%. People living in New York City pay city income tax too of between 2.9% and 3.6%.
That means that the top marginal rate of tax for high earners in New York City (London's great rival) will go up from the current 46.3% to 50.9% under Obama. Compare that to the 41% levied in the UK.
The tax rise comes into effect in 2011, when Obama will have implemented his tax rise. This means that those in the City inclined to complain won't find it viable to up roots and go to New York. They are still better off in London. The 0.5% increase in N.I. will mainly affect those who earn over £20k (due to moving of the thresholds).
The other point to make is that the tax rises will come after the general election, so the country has a chance to vote on it.
Regarding borrowing - the point needs to be made that doing nothing and letting a deep sustained recession take place will kill tax revenue, and force government borrowing up even further. Only the economically illiterate do not understand this. As for public spending, the next round will have an increase of just 1.2%, which is very tight. In order for the Tories to do better than that they will need to actually close schools and hospitals.
So now the battle for the next election is set. People in 2010 will be voting to either increase tax on those over £150k to 45%, or to vote Tory and keep the top rate as it is, to increase the inheritance tax threshold to £2 million from the current circa £600k, and to pay for it by physically closing hospitals.