The best thing George Osborne could do this Wednesday

published 14 March 2016

160314-budget — The Budget is a toxic political pantomime

George Osborne faces a yawning black hole when he stands up in front of the House of Commons on Wednesday.

No, I'm not referring to his efforts to bore his fellow politicians into submission. I'm talking about the latest gap between what he hopes the economy will look like in about four years' time, and what the Office for Budgetary Responsibility (OBR) thinks it'll look like.

He needs to raise money in taxes if he doesn't want to look like a twit. But he also needs to do it in such a way as to prevent most of his core constituents (his fellow Tory MPs) from throwing a major tantrum.

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What an extraordinary waste of everyone else's time and money

The gaping black hole in Osborne's dreams

At the last Budget, George Osborne had promised to make the UK's finances balance by around about 2019/20.

Now that looks under threat. So Osborne has to find a way to raise more money than he'd originally planned to.

It's a major headline headache for Osborne. But it's all nonsense.

The reality of course, is that all of this stuff is entirely abstract. The OBR doesn't know any better than the rest of us what will happen tomorrow. And more than that it doesn't really matter that much. A few billion one way or another is of little relevance compared to the overall strategy.

And this is the fundamental problem here. The chancellor will happily drive the rest of the economy into a wall, just to make a set of almost entirely fictional figures fit this week.

I personally think that the OBR does a fairly admirable job of being independent. But that doesn't get around the fact that it was established for political reasons.

The point of the OBR and all these "checks and balances" is to convince you that the guy who is holding the nation's purse strings is a responsible chap. You can trust him. He'll take tough decisions and make them stick. You won't always like him, but you'll respect him.

It's drivel, of course. The Budget is pure politics. And that makes it utterly toxic for the economy as a whole.

It might be a pantomime, but the consequences aren't funny

The most irritating thing about the Budget is that while it might be a political charade, it's a political charade with consequences.

Every time the chancellor makes a move, it changes the way that people behave.

For example, so far this year, every higher-rate taxpayer in the country has been terrified into stuffing their pensions with extra cash (a move, incidentally, which has probably been quite costly for the Treasury in terms of extra tax relief).

Now we're told that Osborne has U-turned on that. Primarily because another politician David Cameron made another stupid promise that he never expected to have to keep, in order to get re-elected (I'm talking about the Brexit referendum, of course).

So instead we'll get another array of fiddles and flourishes, all of which will distort people's behaviour in a wide range of utterly unproductive ways.

I don't know what the solution is to all of this. Politics is politics. The idea of handing control over various parts of the economy to "independent bodies" with a brief to consider the long term might look tempting on the surface.

But we've already handed over a disturbing amount of power to people we can't directly elect, such as central banks. Hand over even more economic power, and you wonder what the government would actually do all day.

A flatter, more transparent tax system would definitely be a good start. We often talk about how the existence of loopholes and complexity and grey areas results in precisely the kind of stuff we're all moaning about now Google and Starbucks not paying "enough" tax, celebrities sticking money into dodgy tax loss creation schemes, etc.

But we pay a little less attention to how complexity allows governments and chancellors in particular to get away with murder every time they stand up in the House of Commons.

A classic example is National Insurance (NI). Huge numbers of people still believe the fiction that NI (your "stamp") in some way goes into a pot of money marked "Bob's pension". This, of course, is not true. NI is just a hidden income tax. That makes it ideal for governments to mess around with, because few people understand it and fewer still can be bothered to learn.

Another classic, of course, is pensions. People find pensions complicated and depressing. So you can practically do what you want with them.

Gordon Brown trashed them in the late 90s with nary a comment. More recently, while George Osborne has freed pensions up in some ways that we like, he has continued to slash annual allowances, and the higher up the income scale you are made a pension a far higher-maintenance vehicle than it once was. You now have to watch out for the lifetime allowance and the taper, for example.

This is why we like Isas (Individual Savings Accounts). But even there, you have to watch out. They keep making them increasingly complex. You've now got Help-to-Buy Isas, Junior Isas, and soon, the Innovative Finance Isas. We might even at some point get a Pension Isa.

It's one thing to extend the applications of a useful, simple savings tool that most people understand. But the majority of these new Isas have little in common with the standard Isa beyond being tax wrappers.

It won't be long before the benefits of Isa simplicity are gone. And then a future government will start decrying them as tax avoidance vehicles, the same way that higher-rate taxpayers' pensions are now being seen as unacceptable privileges, rather than a rather pitiful and unsatisfactory replacement for the once-common final salary scheme.

This is just an audition process

All of these loopholes and complications come into existence for one very simple reason: the chancellor of the day makes stupid promises that he can't keep.

The best thing the chancellor could do would be to promise no more Budgets until next March.

But then, that would deprive him of the opportunity to command the House of Commons and audition for the leadership.

So don't hold your breath.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.