As next week’s Budget approaches, ignore anything worth less than £5bn – it’s economically irrelevant

Politicians think voters have no idea of the numbers and will react with emotion

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We are a week away from the Budget. The various lobby groups have made their submissions. The Opposition has staked out its ground. The Chancellor is preparing what will, in effect, be his pitch for the election, for come next March there will be no time for anything to have an impact. But the debate has been taking place in a fog, so it might be helpful to clarify the numbers.

Really a fog? Well, consider this. Ed Balls this week set out a plan to spend £1.9bn on a “jobs guarantee” for young people, raising the money from taxing bankers’ bonuses and pensions. Leave the merits of the policy aside and consider this. One of your neighbours has a salary of £100,000. How would you react if he or she told you they planned to spend £190 on a weekend away but could not afford it and would have to ask the in-laws to pay?

It would be absurd. You would think that they were taking the mickey. People on that sort of income would be bright enough to figure out ways to save the money if that is what they wanted to do, without asking someone else to stump up. Now knock off some noughts and apply the calculation to the Government. A salary of £100,000 is roughly £65,000 after tax. The government’s revenue in the coming financial year is forecast to be £650bn. Labour’s calculation of the cost of their youth jobs scheme would, proportionately, be £190.

So in the context of public finances, this is tiny. So why is it to be made a flagship policy by the Opposition? The obvious answer is that politicians believe that the electorate has no idea of the numbers and therefore will react with emotion rather than reason. So here those numbers are. They come from the Office for Budget Responsibility’s estimates for the financial year starting next month, and while they will change a bit the big amounts will be broadly the same.

Revenue is, as noted, £650bn. The three biggest taxes are income tax (£167bn), VAT (£110bn) and national insurance (£109bn). Next in size comes corporation tax (£42bn) and fuel duties, business rates and council tax (all around £27bn each). After that, revenue comes from a series of relatively small taxes – small in revenue, if not in the irritation they cause. Stamp duty on property brings in £11bn, alcohol £12bn, tobacco £10bn, but after that the revenue is very bitty. Add everything together, including what is called the “gross operating surplus” and the number, to be precise, is £646.6bn.

Now look at the other side. The headline number for spending is projected to be £730.5bn. Yup. The next-door neighbour on a net £65,000 is spending £73,000 – unlike the Germans who have moved in up the road and have a balanced budget.

That £730bn divides into two huge chunks and one small one. The small one is investment, a net £28bn. The biggest of all, £362bn, is transfer payments – money the Government takes in but then sends straight out again. Of this, the largest category is social security, costing £183bn, with tax credits another £29bn. The other big payments here are debt interest, £54bn, and payments to local authorities, £35bn.

The second huge chunk is what the Government spends on the services it provides, costing £317bn. We won’t know till next week the precise numbers and, interestingly, there seems to have been some underspending this year, but estimates from last year’s Budget will be more or less right. So the single biggest bill is the NHS, costing some £140bn. Then comes education, just under £100bn, defence £40bn, and what is called public order and safety, £30bn. After that the numbers are relatively small, for example the Foreign Office costs less than £2bn – though that is dwarfed by spending on overseas aid of £11bn.

So what, listening to George Osborne next week, or to the response by Labour, or to squeals from the special-interest groups, should we think? I suggest three principles.

First, disregard any statement or announcement where the number is less that £5bn. Of course, we may be personally affected by tweaks in the spending or taxation system and they matter politically. But in economic terms anything less than £5bn is irrelevant.

Second, look at the revenue projections because they will determine whether this Government’s projections are credible or not. It is the big taxes that matter, not the annoying little ones. If they do well, everything is more or less OK. If they fall short, the next government faces big trouble.

Third, remember the number 38. That is the percentage of GDP that our governments have, for the past generation, been able to raise in tax. None of them, Tory, Labour or Coalition, has been able to sustain revenues above that. Unless you believe that we are prepared to pay more in tax than we have at any time for most people’s working lives, that is what there is to spend. Simple as that.

At last, some good news from Europe

Europe has turned the corner. Consider this, all from the past few days. Italian GDP was confirmed at 0.1 per cent for the final quarter of 2013, which may not be great but is the first growth for two years. The German trade surplus has narrowed, with imports up more than 4 per cent on the month. The head of the Eurogroup, the main entity for sorting out Greek indebtedness, says there may be a deal this week to increase the country’s funding. Portuguese GDP has shown the third quarterly rise on the trot. And while the French economy is undoubtedly weak, the central bank has forecast it will grow by 0.2 per cent in the first quarter.

If that is all a bit mushy, consider these hard numbers. We don’t yet have February figures for European car sales, but in January in Ireland they were up by 33 per cent on the previous January, in Portugal they were up 32 per cent, and in Greece they were up 15 per cent.

What should we make of this? The first point is that it is easy to have a great leap forward if you start from far enough back. Levels of unemployment, especially youth unemployment, are intolerable. But a turning point is a turning point and it is pretty clear that the eurozone economy will stage a cyclical recovery for the next couple of years at least, probably longer.

This is most welcome, socially as well as economically. It is welcome here in the UK, where the eurozone remains an important market. But it is important to separate the cyclical from the structural, and Europe’s structural challenges are as daunting as ever. And if the upswing reduces pressure to make reforms, then the outlook for the weaker eurozone economies remains poor. Meanwhile, they can be allowed a modest cheer – or, more practically, a new car.

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