#ukbudget2012

The budget came out yesterday and people from all sides of the political spectrum are saying how bad it is. The right for not giving big enough tax cuts which they claim are needed for growth and the left saying more austerity is bad for the system.

It's an interesting dynamic because of the two arguments in play here. Keynesian economics teaches us that through government spending we will increase aggregate demand, raising GDP to decrease the deficit relative to GDP which is most relative measure of public sector spending and debt. However, the growing concern is that the markets are demanding (as politicians believe) fiscal responsibility because without it gilts become riskier and thus demand is lower and borrowing costs become higher. Thereby increasing government spending on debt servicing and can create a downwards spiral past the reportedly dangerous 7% rate that is deemed unsustainable. That said, as the UK has its own central bank QE can be used to bring borrowing costs down but this can lead to inflation and crowding out of the bond markets for investors so ultimately the only purchaser of gilts becomes the BoE and this could become very dangerous for economic and political reasons.

The reported cuts on welfare benefits and tax credits vs the reduction in highest rate of income tax is an interesting debate in itself. Those on benefits and/or needing state support are going to spend them majority of their income domestically on standard living costs (food, clothes bills, etc.) so this is direct stimulus for consumption to lift aggregate demand and GDP. However the argument in favour of cutting welfare spending to pay for tax cuts to the highest rate is two pronged: 1. it incentivises individuals and companies to conduct operations in the UK because the tax rate becomes more favourable whilst lessening (in theory) the reason for tax avoidance and evasion; 2. as higher earners are less likely to spend the greatest percentage of their earnings (versus low income earners) on living costs and general UK based consumption (as opposed to holidays abroad etc.) so this unspent earnings are deposited in banks which can then be leant out in the forms of business loans, mortgages, etc. to boost the economy this way just as with the cuts in corporation tax.

George Osborne said the budget is one to incentive work and in many ways it does do this. The increase in the threshold of tax for low income earners, at the same time as welfare payment cuts, increases the incentive for people to take jobs, rather than fall into the benefit dependency trap whereby the marginal utility of being a member of the work force is diminished because the underclass (sorry for using this term if anyone is offended by it) are financially better off unemployed because the benefits are greater than their pay cheque or the effort required to work isn't, perceived by the underclass, to be great enough for the marginal increase in financial standing.

The interesting point is the increase in stamp duty for homes over £2m. I personally believe (this is the first time I am using my own opinion here) this is a tactful political play to off-set the damage from the cut in the highest rate to appeal to the centre and the left for the concept of "we're all in this together".

Time will tell whether George Osborne has made the right (not 'the right') decisions here, economically as to whether the economy will grow and politically as to how the Coalition fares in opinion polls and ultimately the 2015 election. There will probably be greater squeezing in the middle (sorry for the cliche) but this is where taxation revenues come from, there are less people at the top and very little taxable income and spending at the bottom, so the country just has to hope it isn't squeezed too hard.

A final point; I am honestly in favour of the Coalition of the two parties, the balancing of fiscal responsibility with social progression is a good thing. This temporary pause of polarised partisan politics is a good thing with compromise reflecting what people want.

Details on the budget as well as the full documents are available for download from the BBC website: