Bad news budget?
The coalition government's first budget was never likely to be a bundle of laughs, but just how bad will its austerity measures be for the retail and hospitality industries? Peter Burgess takes a look at the likely fallout.
The starting point for all retail or hospitality organisations has to be that anything taking money out of the economy means less cash spent in their establishments. As such, a budget for austerity was never going to make the tills start ringing. However, unless you have been living on Mars for the last two years you will know that substantial public spending cuts of one sort or another were not only inevitable but necessary. Very necessary. Irrespective of the election result, the sorts of measures that are currently being implemented were always going to happen - the only major difference of opinion between the two main political parties was the timing of the cutbacks.
Gordon Brown shared the viewpoint of the American government's financial gurus, wanting to wait a year in order to provide shelter for the tentative recovery whereas David Cameron, for possibly the only time in his administration, aligned himself with the deficit hawks of continental Europe - taking the view that drastic measures were necessary immediately to prevent economic armageddon. You can make a case for either viewpoint but, as the UK voters opted to be singing the Blues as it were, it is Mr Cameron's financial mettle that is going to be tested. Thus George Osborne finds himself in the sort of media glare usually reserved for namesakes Ozzy and Sharon.
Taking billions of pounds out of the economy means removing billions of pounds that might have been spent on the high street or on leisure activities. It is understandable then that almost every single trading statement issued in the last month or two by major companies in hospitality and retail has cited the potential impact of the budgetary measures as a source of caution when it comes to predicting future performance. Just like you and me, the large companies will be watching carefully to see who is most affected not only by the cut-backs themselves but also by the inevitable hit to consumer confidence their implementation will provoke. So has the new government got it right?
Let's start with the VAT increase. Never mind the fact that the Tories weren't elected on this platform, this was always going to be an easy target for any in-coming government. Indeed it's depressing that all the parties lied before the election because they all had their eyes on VAT as an 'easy win'. Does an extra 2.5% in cost mean you won't buy that extra pair of shoes or the plasma screen TV? While it probably won't make any difference to most of us when it comes to our own budgetary decisions, it's still going to soak up £13 billion of spending, most of which would have been spent in our shops, restaurants and hotels.
What I find particularly sad about this emergency measure is that there was no commitment to reverse the increase once the deficit had been brought under control. Like in so many other areas, once the Government has found a cash cow, they will milk it for all it is worth for as long as they can get away with. A VAT rate of 20% is in line with other European states but so what? We know that much of Europe is heavily over-taxed. As for VAT being a regressive tax (i.e. hurting the poorest the most), this argument is overblown. The key staples that poorer people spend their money on - food and rent - do not attract VAT at all and utilities only a limited amount. On the goods that will have an increase, clothes, furniture etc., this is largely offset for the working poor who have had personal allowances increased substantially.
While we're on the subject of the raised personal allowances, what a pity that the Government did not have the courage of their convictions and go the whole way. I have said this before in this column but to my mind the biggest injustice in the tax and benefit system today is still that the working poor pay too much tax. The flagship Lib Dem policy was to raise personal allowances to £10k per annum. It was watered down but there is a commitment to get there eventually. I hope they do. In fact no one earning minimum wage or less should be paying tax or NI. Implement that sort of policy and see what that would do to the dole queues.
Cuts in the public sector to both staff numbers and pensions are not only desirable but long overdue. It is obscene that some public sector workers enjoy gold-plated pensions, better working conditions and higher salaries than their counterparts in the private sector who suffered cuts in pay and had their pensions savagely cut by Gordon Brown almost immediately on taking office. The next time I hear a public sector worker bleating on TV, about "they didn't cause the recession", I may boost Dixons' sales by throwing a brick at my set. Nor did the vast majority of the private sector! A few greedy bankers and some incompetence in government caused the recession. There are as many guilty civil servants as there are guilty bankers.
Finally on cuts to benefits; I am sure I am going to sound like a rabid Thatcherite on this, but I am afraid I am sick and tired of people claiming benefits as a matter of right rather than need. Whilst I have huge sympathy for those thrown out of work and unable to find other jobs, it is simply untrue that everyone claiming benefit deserves it. The working poor are taxed so heavily and the benefits are sufficiently generous to encourage hundreds of thousands of people to choose not to work. This position is unsustainable.
To summarise, tough times ahead, especially for those of you based in areas such as the north east, which are heavily reliant on state spending. But, as the outgoing chief secretary to the treasury, Liam Byrne said: "there is no money left".