UK budget: short-term gain for long-term pain

The measures Chancellor George Osborne announced today to encourage greater charitable giving can be seen as a microcosm of the coalition government's overall approach to the economy. Simplification of the Gift Aid rules (yay! no more of those silly little forms!) and provision of an inheritance tax cut for those willing to give 10% of their estate to charity will no doubt benefit a lot of good causes. It's the only measure in the budget that's overtly inspired by the government's "Big Society" agenda.

One-offs like Red Nose Day aside, the UK generally lags behind many other wealthy countries, especially the United States, in charitable giving. It's always seemed likely that this relates to the ever-expanding spread of the state: if the government claims it can solve all of society's problems, and taxes you to the hilt in order to do so, why do you need to be generous to charities? (I'm not endorsing this line of reasoning, just reporting it). As public spending cuts bite in the next few years, improved incentives for charitable giving may help charities to raise the funds they need to fill the gap. The problem is, the government can only actually guarantee one half of this outcome. It can cut spending all right, but it can't guarantee that charitable giving will rise quickly enough (or at all) to ensure that nobody gets left by the wayside.

This is a microcosm for the government's overall approach because they're trying to achieve much the same thing in a macro policy sense. The loss of thousands of public sector jobs in the coming years is an inevitable consequence of the policies the government has adopted, whereas the hoped-for jump in private sector employment is much less certain. Very much less certain, in fact: the GDP growth forecast for 2011 and 2012 has been revised down again, so the overall level of employment is now forecast to be lower than the government had previously hoped. Unsurprisingly, this also means that the budget deficit is now forecast to decline more slowly than the coalition predicted in its emergency mini-budget last summer.

In truth, this was not so much a fresh budget as a series of headline-grabbing populist measures that the Chancellor surely hopes will divert public attention from the fact that all the tough spending measures announced since the election are just about to bite. That's not to say that today's measures are wrong in themselves: for example, raising the minimum threshold for income tax is a progressive step, and the replacement of inflation-plus fuel tax rises with a "fair fuel stabiliser" should both ease the near-term burden on households and make the task of policymakers easier, by curbing inflation expectations. However, these things are not the real story, something we are all set to discover in the coming months as the planned multi-year reduction in public spending really gets rolling. Next time someone in the family falls sick, the dash to the hospital may cost you a bit less in fuel, but that won't be much consolation if the A & E has closed down.