What does history teach us about pre-election budgets?
March 11, 2015
George Osborne’s sixth budget speech is his last before the election in May. So will it be laden with giveaways, or will he play it safe? Our VAT manager looks back at recent pre-election budgets to find out what might be in store this time around.
Chancellors are nothing if not bullish when it comes to pre-General Election budget posturing.
In his final budget as chancellor in 2010, Alistair Darling used the fact that the national debt was ‘not as big as predicted’ to tell the electorate that Labour had been “right about the recession, right about the recovery”.
With hindsight, we now know that the recovery was still a long way off and that the public finances were in a bigger mess than everyone thought they were. This became evident just days after Labour lost the election with the infamous note left by outgoing Chief Secretary to the Treasury, Liam Byrne, to his successor David Laws that said simply: “I’m afraid there is no money”.
Seriousness and realism
The financial reality became even clearer just a few weeks later with George Osborne’s emergency budget in June when VAT was immediately raised to 20%, child benefit and public sector pay were frozen, and an immediate 25% cut in public service spending was announced. It gave us the seriousness and realism that an emergency budget affords a new government.
There were no such problems just five years before this, long before the economic downturn, when Gordon Brown used his pre-election budget to double the level at which house buyers pay stamp duty to £120,000, unveiled a £200 council tax refund for pensioners and a rise in child tax credit. Interesting to note that the Conservatives called this a “vote now, pay later” budget, while the Lib Dems claimed it was a “sticking plaster” for the election.
Despite these giveaways, Mr Brown claimed that this was still a prudent budget and that he would do nothing to mess up the economic stability he had brought to Britain, and which he claimed would be jeopardised by anyone else. Of course, nobody predicted the banking crisis at this point in time.
If Gordon Brown had it good in 2005, he had it even better in 2001 when he stood up at the despatch box with an estimated £15bn surplus burning a hole in the famous red briefcase and duly pledged an extra £2bn for health and education over three years.
It gave Mr Brown an opportunity to tie the Conservatives up in knots as he asked them to explain how they would actually cut public spending to fund tax cuts. Then shadow chancellor Michael Portillo said the Conservatives would match Labour’s spending plans and still be able to cut taxes but, of course, they never got a chance following a second Labour landslide election victory.
Arguably Mr Brown’s most famous budget speech was his 1997 “People’s Budget” made in June of that year just after Labour had swept to power under Tony Blair leadership. He immediately scrapped the proposals made just weeks earlier by the Conservatives, announcing a £5bn one-off tax on recently privatised utilities to fund an ambitious welfare-to-work programme, while also cutting VAT on fuel and reducing corporation tax.
Last chance saloon?
Such emergency budgets offer us a stark reminder of the precariousness of government and that pre-election budgets often need to be taken with a pinch of salt.
There is a certain kind of tension about them. Nobody seems quite sure what’s going to happen next. Chancellors can lack conviction, not knowing if they will be in government long enough to implement their plans. The opposition, without the budget detail, can appear superficial in their response, almost as if they don’t want to say anything that will come back to bite them or scupper their own election chances.
It’s not an ideal scenario for business owners who want clarity and certainty to help inform their decision making, especially if the election that follows turns messy with no clear winner and no government being formed until summer.
So, what will happen this time? I expect Mr Osborne will stay true to his rhetoric about sticking to a long-term economic plan to reduce the budget deficit. He will claim it is business as usual, but I think he may well be tempted to pull a rabbit out of the hat. It could be his last chance.