Boredom rules OK

Budgets are getting more boring. When James Callaghan delivered a non-event some 30-odd years ago it was, well, quite an event for a Chancellor to do so little on his big day. Now it is becoming routine.

It may seem strange to call a Budget boring when government borrowing is signalled to reach unprecedented levels for several years and we are returning to the days of taxing higher earners but most of what we heard from Alistair Darling was already well known and forecasts are, especially in the current climate, to be taken with a pinch of salt.

To turn the Budget into a low key affair is no bad thing. When Callaghan delivered his uneventful Budget, people had been complaining that slamming all the government's tax and spend measures into one afternoon was too blunt an instrument. Government goes on all year (even if MPs can swan off for 12 weeks this summer).

Budget measures were a closely guarded secret until the Chancellor announced them in parliament and they could strike with the suddenness and force of a sledgehammer.

Now we have moved to the other extreme. Gordon Brown, during his tenure, started to announce measures to take effect months in the future so we all knew what was coming. Now we have new measures such as the allowance for scrapping old cars being leaked in advance.

As Darling spoke I was struck by two things. Firstly, his style. He is much more subdued than Brown, not only because the economy is so much more subdued but also because it is his character. Darling may be a cold fish but I am warming to him. I find him less irritating and more reassuring than Brown’s economic arrogance.

Darling inherited a mess and is trying to do something about it. Brown inherited a strong economy and did something about it.

Secondly, it was noticeable how few cheers, jeers and interruptions there were. Budgets used to be an opportunity to get hot under the collar. Now, with so little to announce, the scope for righteous indignation is stifled.

What of the actual measures, such as they are? The Tories are claiming we are back to class war and it is true that higher rate taxpayers are singled out, though we already knew that a higher tax band was to be introduced.

I’m sure we all agree that in the present circumstances we are going to have to pay more tax over several years and high earners will have to stand their corner. The actual measures, 50% rather than 45% income tax and changes to personal allowances and pension arrangements, are tougher than expected but high earners do have some respite to next April. Smokers and boozers get clobbered now (at least that is one Budget tradition that has been maintained). Car drivers will see yet another fuel tax increase in September.

The main interest in the Budget lies in the economic forecasts. Yet these are mere projections that could be hopelessly out. As Darling said in his speech, the IMF has revised its forecasts three times since last October. Darling’s own previous projections have been way out and his suggestion now that the economy will shrink by 3.5% this year and recover next year will undoubtedly be erring on the side of optimism.

Even the forecast of £175 billion in government borrowings, followed by more massive deficits shrinking very slowly over the next few years, may be an understatement. Economists were agitated when the Budget deficit reached £40 billion in a single year. Now we are going to hit more than four times that.

These figures are too big to comprehend but there is one way to put them into perspective. Remember the horrors of crude oil shooting all the way to $150 dollars a barrel? The rise in the Budget deficit is on the same scale - with a bit more on top and without the sharp fall back to previous levels.

The problem with these forecasts is that no-one really knows how much changes in the budget will cost or bring in. Thus the hope that taxes on high earners will bring in an extra £5.5 billion a year is based on the supposition that nothing else changes. If high earners move abroad or find ways to hide their income then the take will be less. There is a point where higher income tax produces less, not more, revenue.

It is hardly surprising that the stock market gave such a muted reaction to the Budget. There was not a lot to react to.

For this relief much thanks
Some good news in the Sunday Times: dividends fell by 40% in 2008 and are forecast to fall a further 18% this year.

That may sound grim but, as so often with statistics, you can make them say what you want them to say and you need to put them into context.

Way back at the start of last year (it seems a long time ago now) we were fearing the end of the world. To find that dividends are down only 40% is quite a relief. Given that banks such as Lloyds and RBS cannot pay a dividend, it is also some relief that the forecast for 2009 is not worse.

On this basis, you would expect shares to have fallen by about 50% from their peak – and that is not far off. We got to 6,700 on the Footsie in August 2007 and hit a low around 3,600 points earlier this year. The slight pick up to just above 4,000 points is starting to factor in a mild recovery next year.

One other consideration is that savings rates have collapsed much more rapidly than share prices, certainly by a good deal more than 50%. So if you buy shares in companies still paying a dividend and those shares fall a little you are still better off than using a savings account.