The Government's redistributive exercise?

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“Budgets are also political exercises, with the government suggesting that the tax and spending measures will boost the economy and help various sectors and the opposition castigating most measures as misguided or ‘doing too little’. Thus, while the headlines indicate a ‘no surprise’ budget on the whole, we will have to assess the true impact more carefully as the various measures affect incentives and play out with the price system adjusting to the changes.”  

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The budget is the government’s annual redistributive exercise. Each year, the government’s budget has an effect in terms of receipts and spending but its impact plays out in a number of ways which is not always obvious. One of the expectations this year had been around investment in housing and steps to encourage home ownership. There has indeed been increased investment in housing and first time buyers are exempt from stamp duty for houses under £300,000. Yet, the actual impact of this may simply be higher house prices, helping those own property. This is a good illustration where tinkering with market prices lead to gains for groups that are not targeted.

None of the measures announced today are wholly unexpected, the Chancellor is facing a difficult choice between increasing spending on public services that are badly stretched and increasing the deficit (forecast to be much larger than expected), thereby implicitly burdening future generations unless one hopes that some of the budgetary measures will also stimulate growth.

Budgets are also political exercises, with the government suggesting that the tax and spending measures will boost the economy and help various sectors and the opposition castigating most measures as misguided or ‘doing too little’. Thus, while the headlines indicate a ‘no surprise’ budget on the whole, we will have to assess the true impact more carefully as the various measures affect incentives and play out with the price system adjusting to the changes. Added with the uncertainty created by Brexit, it will be a very bold person who can confidently forecast the medium run impact of this year’s budget.

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