George Osborne’s credit is running out

David Cowan 2.00pm

The Osborne brand has been heavily devalued since George Osborne’s politically disastrous budget. It initiated the ‘omnishambles’ of the past few months which was then followed by a ridiculously long set of U-turns over taxes on pasties, caravans, charities, heritage, and petrol. After weeks of government ministers loyally defending the budget these policies were swiftly and unceremoniously ditched with little or no notice. Often these announcements came within days of each other with the consequence that loyal ministers and MPs had been made to look incredibly foolish.

Just think of Chloe Smith on Newsnight after George Osborne announced that the autumn increase in fuel duty would not go ahead. Even the Secretary of State for Transport, Justine Greening – a loyal Osbornite by all accounts – was kept in the dark about the change of policy. The U-turn over fuel duty was perhaps the most misjudged as it still managed to backfire on George Osborne as that very same morning Ed Balls had called for such a change of direction in The Sun. As a result it looked more like a victory for Ed Balls and another wobble from George Osborne. Many in the Conservative party now see him as “too damaged” to be a credible successor to David Cameron.

Last week Osborne made his bid to regain some of his credibility as de facto Chief Strategist of the Conservative party with a provocative interview in The Spectator where he claimed that Labour aides were “clearly involved” in the Libor scandal, but without mentioning names. When it resulted in a clash in the House of Commons debate that very same day Ed Balls exclaimed “He has impugned my integrity in The Spectator!” It was a very partisan performance delivered in order to boost Conservative MPs’ confidence in him. George Osborne may appear to have done this by securing a parliamentary inquiry into the banking industry, instead of a judicial one, which will undoubtedly question Ed Balls and the other architects of the faulty regulatory system which helped precipitate the financial crisis in 2008.

But to many Conservatives the parliamentary exchange between George Osborne and Ed Balls looked like a sordid display of petty politics- not statesmanship. While it is of course important that Ed Balls et al are made accountable for their disastrous policies, there is still a feeling that George Osborne is far too focused on playing politics instead of doing his job. If this perception dominates how the electorate see him at a time when Britain has gone into a double-dip recession, the Eurozone crisis is engulfing the continent, 2.61 million people still unemployed, and the Bank of England printing money like there is no tomorrow, then the Osborne brand will continue to decline in value.

Within the wider context of the various deficiencies in George Osborne’s economic and financial policies, this run on his credibility is only going to continue. His plan for growth is far too heavily dependent on a policy of cheap credit from the Bank of England and fiscal stimulus from the Treasury (see my article on last year’s Autumn Statement) and clearly is not working. Another problem is that his deficit reduction plan has so far been implemented through tax rises while spending cuts will not actually start to bite until the eve of the next general election and will continue into the next parliament. It is now very likely that on polling day in 2015 the electorate will still be feeling the pinch of meagre growth, rising cost of living, and harsher spending cuts.

A wealth of radical policies for growth has come from across centre-right politics. Conservative MPs have set up groups like the Free Enterprise Group, 2020 Conservatives and The Growth Factory in order to formulate new policies to liberalise the economy. Numerous think tanks have delivered fascinating reports on boosting growth, like the Institute of Economic Affairs’ ‘Sharper Axes, Lower Taxes’, the Centre for Policy Studies’ ‘Small is Best’ publication and helpful infotoon, and the TaxPayers’ Alliance’s 2020 Tax Commission Report. They are all calling for the same spirit of Tory radicalism which has been advanced by Michael Gove and Iain Duncan-Smith, with a clear economic plan based on larger spending cuts, lower taxes, deregulation and sound money.

It is of course difficult for Osborne to recalibrate his economic and financial policies more firmly in this direction because of the Liberal Democrats. But this then begs the question of what happened to ‘Orange Book liberalism’ which was so superbly articulated by David Laws? The coalition seems to baulk at every opportunity of providing a more robust plan for growth. Instead we have seen streams of micro-initiatives put forward while radical policies, like the Beecroft Report’s proposal for making it easier for employers to hire and fire employees, get side-lined. Policy making has become a zero-sum game in which decisions are prevented from happening whilst civil servants are left to their own devices with disastrous consequences, like in this year’s budget. The coalition simply cannot function without an effective policy machine with both parties contributing to new economic radicalism.

George Osborne is undeniably a political animal. He has had numerous political coups like in 2007 when his inheritance tax cut pledge helped spook Brown into bottling the election, but there is a serious job to be done. If we are going to see an effective plan for growth based on spending cuts, lower taxes, deregulation and sound money which has the support of both coalition parties then George Osborne has to focus, otherwise the blood of electoral failure in 2015 will be on his hands.

Follow David on Twitter @david_cowan

A curate’s egg of a Budget?

David Cowan 6.02am

On Wednesday, George Osborne grew in stature as a Tory Chancellor. The Budget was the most definitive account of the Government’s plan for growth. Yet it was mainly framed as a tax reform budget, and it is by this standard it should be judged.

In which case, it was also something of a curate’s egg. In places it was bold and radical, while in others it did not go nearly far enough.

Mr Osborne articulated a clear, long-term vision for tax reform. He began by claiming Adam Smith as his guide, embracing the principle that taxes ought to be “simple, predictable, support work, and they should be fair”.

The establishment of the Office for Tax Simplification (OTS) demonstrated Mr Osborne’s commitment to sustained reform of a tax code that must be “fit for the modern world”. (This already comprises measures such as merging the rates of income tax and National Insurance.)

There is the Personal Tax Statement, first proposed by Ben Gummer MP, which will appear for the first time in 2014. It will tell taxpayers exactly how much they are paying in tax and exactly where that money is being spent. This is particularly important at a time when people do not know how much of their hard-earned cash is consumed by the costs of servicing our £7.9 trillion debt.

At the heart of this Budget is the start of a serious shift in taxation from income to wealth.

The 50p top rate of income tax will be reduced to 45p in April 2013, but Mr Osborne has already reassured Conservative MPs that the new top rate will not be permanent. Following the announcement on Wednesday, Ed Miliband immediately rolled out the tired old rhetoric of faux class warfare. The fact is that the top rate was not raising any meaningful revenue - a mere third of what was promised - and as page 91 of the Red Book proves, it will actually be the millionaires paying more after this Budget.

The group of taxpayers that Mr Osborne ought to be most concerned about are the taxpayers still stuck in the 40p higher rate, between £41,450 and £150,000, especially since he has just shifted 300,000 new taxpayers into that category.

This situation is not helped by the changes to Child Benefit. What the economist Andrew Lilico has persuasively argued is a tax rebate, not a welfare benefit, has effectively been taken away from the important ‘squeezed middle’ at a time when living costs are still rising painfully.

Then there is the so-called ‘Granny Tax’, which was ‘unearthed’ by linguistically creative journalists hours after the Budget. Despite the Brown-esque manner in which it was delivered, the policy remains a sensible one. Mr Osborne has said that the age-related allowances will be frozen from April 2013 onwards. The impact has been exaggerated, as Sara hinted at yesterday, and it will be alleviated by the planned increases in the personal allowance.

This leads on to the Liberal Democrats’ key victory: the acceleration towards a £10,000 income tax personal allowance. As a result of this Budget, no-one will pay income tax on their first £9,205 as of April 2013. Everyone working for the minimum wage will see their income tax bill halved.

This has not stopped Conservative MPs from claiming some credit for the policy, as Nick Boles did during the pre-Budget PMQs, and as Robert Halfon’s fascinating Right Angle campaign web site has done of late.

However, what really matters is how these tax changes are funded. Mr Osborne, under pressure from the Lib Dems and even Tories such as Boris Johnson, unleashed a new set of measures to target wealth, largely through tinkering with Stamp Duty.

A new 7 per cent rate will be levied on £2 million properties and a new 15 per cent charge will be used to crack down on the use of corporate envelopes to avoid tax when purchasing properties.

Capital Gains Tax (CGT) will also be extended to residential properties being held by overseas envelopes. This will be accompanied by a new range of anti-tax avoidance and evasion measures.

Altogether, it means that the richest will pay up to five times more than they would have done with the 50p income tax rate.

This is the correct direction of travel for direct taxation. Wealth should be taxed in a manner that is fair and which encourages wealth creation. Yet it still remains the case that the best way to do this is a Land Value Tax (LVT), within the context of simplified property taxes.

The main rate of corporation tax was reduced by 2 points, which will eventually mean corporation tax of 22 per cent in April 2014 - well below the level of comparable countries like the United States but not as low as Ireland’s 12.5 per cent. Mr Osborne wants the rate to come down to 20 per cent by 2015.

But the method taken to fund the reductions in corporation tax was misguided. The bank levy is one of Mr Osborne’s more harmful gimmicks and has yet again been increased (to 0.105 per cent) at a time when our financial services industry needs to be made more competitive, not less.

Mr Osborne has also taken a leaf out of Sir Geoffrey Howe’s book by increasing indirect taxes on consumption (e.g. 5 per cent hike on tobacco duty) to fund deficit reduction and ever-increasing public expenditure. Albeit to his credit, he has managed to keep fuel and vehicle excise duties lower than they would have been under a Labour government.

George Osborne’s vision is of a tax code that is more transparent, where direct taxation moves away from income towards wealth, in which a more competitive business tax regime can boost growth, and where taxes on consumption help to maintain ‘fiscal stability’. Regrettably, political gimmicks like the bank levy and other tax raids continue to infect Mr Osborne’s agenda.

Earlier this week, I asked whether George Osborne could join Neville Chamberlain and Sir Geoffrey Howe among the pantheon of great Tory Chancellors. Wednesday’s Budget brought him closer to the mark, but not quite the whole hog. His fiscal plans have been blown off course since last November and we are yet to experience the full dangers of the largest experiment in quantitative easing ever embarked upon.

Follow David on Twitter @david_cowan

Breaking down the Budget

Sara Benwell 10.53am

Another year, another Budget. Another abortive attempt to find a pub with a garden and a telly with the Budget on it, so that I can enjoy the sunshine and a glass of wine (but perhaps not, thank you very much George, many more cigarettes).

This year’s Budget has been called ‘radical’ by members of the press. It contains many positive elements, including tax measures to help the lowest earners and stamp duty increases for the most expensive properties.

On the negative side, pensions have taken a pounding and there is scant help for the nation’s savers. Let’s look at the headline measures and see what they actually mean in practice.

Income Tax personal allowance to be increased to £9,205 in April 2013

This is the big good news story, which will mean a real cash gain for British workers. George Osborne said this Budget would reward work and this will do so, while also keeping the Lib Dems happy (it is, in essence, a policy they mostly instigated). It means that the Government is hopefully going to reach the £10,000 level desired by Nick Clegg sooner rather than later.

It is worth noting, however, that hidden in the Budget, the Chancellor has lowered the threshold for the 40p higher tax rate from £42,475 to £41,450.

50p top tax rate to fall to 45p

This could be interpreted as a political gamble, rather than financial decision. A nod to the well-heeled and a sop to the right-wing, it could sit well with ‘traditional’ Tory voters.

But it isn’t. While the move will only (directly) assist the highest earners, Mr Osborne said the 50p rate had distorted the economy by encouraging tax avoidance and the cut to 45p will only cost the Exchequer £100 million.

He also claimed the richest would be paying five times more than before, due to other measures such as the increase in stamp duty on properties worth more than £2 million.

Age related additional personal allowance to be phased out

This is already turning out to be the biggest headline of the Budget, with #GrannyTax being the highest trending topic on Twitter yesterday afternoon. Commentators circled in their droves to criticise the changes, for instance Iain Martin on Telegraph blogs, who said it would “spark a war between the generations”.

The Chancellor announced a phasing out of the higher income tax allowance, meaning that from next year, people turning 65 will no longer qualify for the higher rate allowance of £10,500 and instead only receive the standard allowance, which was raised to £9,205. This change, reported to be worth an additional £3.3 billion over the next five years for the Treasury, represents one of the biggest money-makers of yesterday’s Budget.

It is a strange move from Mr Osborne, given that retirees are, statistically speaking, more likely to vote - and vote in great numbers. (While the top rate reduction, conversely, will affect very few voters.)

What we have to remember is that pensioners have also borne the brunt of quantitative easing as annuity rates have been hit hard (see Fraser Nelson’s figures of an ‘annuities rate massacre’ on the Spectator's Coffee House), and whose savings are already hit by with record-low interest rates.

Nevertheless, we ought also remember that most pensioners don’t pay any tax at all and this change will only affect those who earn more than the average working wage.

Child benefit gradually withdrawn from those earning over £50,000

Mr Osborne has bowed to considerable pressure from his own MPs and diluted plans to remove Child Benefit from all families containing at least one higher-rate taxpayer.

Under this new scheme, anyone earning up to £50,000 will be able to keep their Child Benefit, worth £1,055.

Child Benefit will still disappear but now only gradually for parents earning between £50,000 and £60,000. Earn above £60,000 and you will lose the lot.

One of the biggest concerns with the original plan was that it didn’t take into account single income families with that single income falling into the higher bracket - and this problem still exists. Mr Osborne will continue to face criticism as the cuts hit families with a sole high earner on more than £60,000 but not families with two parents earning up to £49,000 each.

New Stamp Duty of 7% on properties worth more than £2m (and rate on company-bought properties rising to 15%)

It is a policy designed to show that the biggest burden should fall on the wealthiest.

It will mean that anyone purchasing a property above the £2 million threshold will be looking at a Stamp Duty bill of at least £140,000.

Property investors will also be a casualty of the new charges on high-value homes.

The Chancellor emphasised a crackdown on tax avoidance and unveiled three extra levies on people buying homes via companies. In future, people who purchase properties for £2 million or more via a company will have to pay Stamp Duty at 15 per cent.

There will also be a consultation on whether people who have already bought homes worth more than £2 million through companies should have to pay an annual levy.

These Stamp Duty changes will have a disproportionately high impact on the London property market. Take just one borough, the Royal Borough of Kensington & Chelsea, for instance, whose average property price is more than £2 million. Some are concerned it could have negative repercussions for London as an international business centre as it will discourage corporate executives from basing businesses in the capital.

Follow Sara on Twitter @sarabenwell

If Osborne succeeds, he could join Neville Chamberlain and Sir Geoffrey Howe in the pantheon of great Tory chancellors

David Cowan 10.26am

As George Osborne has approached his third Budget as Chancellor, the press has been abuzz with speculation about future taxation.

This has largely been fuelled by the public airings of Liberal Democrat tax demands, such as an accelerated timetable for raising the income tax threshold to £10,000 (itself a policy strongly supported by Conservatives) or Nick Clegg’s nebulous 'tycoon tax'.

Even Ed Miliband has waded in with a proposal to reverse tax credit cuts. But there has not been any word from the Conservative front bench - as traditional Budget purdah prescribes.

Any meaningful discussion of Mr Osborne’s economic policies cannot be centred on ideology, but on political pragmatism.

Certain commentators, such as Spectator editor Fraser Nelson and the Telegraph's Peter Oborne, have noted how Mr Osborne is a part-time Chancellor of the Exchequer, and full-time political strategist.

For Mr Osborne, taxes should in the long run be lower and simpler, but fully funded tax cuts can only be made once fiscal stability has been achieved. Above all, tax cuts cannot allow the Conservatives to look like the party of the rich. This ‘fiscal conservative’ approach is very much part of the strategy for a Conservative majority in 2015.

The narrative weaved in the press and driven by Lib Dem leaks has so far described a Budget in which the 50p top rate of tax will be scrapped and the lower threshold raised faster, both policies funded by a new tax raid on pensions. It is all symptomatic of the wider tax debate within and without the Conservative party that says direct taxation should be shifted from income to wealth.

The last two Budgets have been attempts to raise additional revenue by targeting the wealth of the ‘super rich’ but they have tended to result from confused tactics rather than coherent strategy. The arbitrary increases to the bank levy, a £50,000 non-dom charge, a tax raid on North Sea oil and gas, new taxes on private jets - these are all policies motivated by envy, not sound economics.

Other ideas produced by the Lib Dems, such as a mansion tax on £2 million-properties or new council tax bands for high value homes, or Labour’s Bonus Tax, which the party has already claimed will support nine different schemes, are similarly flawed. It wouldn’t be surprising if this sort of misguided thinking infected the Budget tomorrow.

Yet there is a robust case for transferring direct taxation away from income, towards wealth. Nick Boles recently argued at the TRG’s Macmillan Lecture for a Land Value Tax (LVT), and I have previously described on these pages how a LVT could form the basis of a new agenda for tax reform. This is the only fiscally sustainable and fair means by which direct taxation can make the transition from income to wealth but it is unlikely to make an appearance tomorrow.

Mr Osborne must stand by his ‘fiscal conservative’ strategy by not allowing unfunded tax cuts to threaten deficit reduction or to portray unfairly the Conservative party as the party of the rich. The Lib Dems cannot be permitted to imagine themselves as the solely compassionate side of the coalition.

Nor should tax cuts come at the expense of costly gimmicks to ‘bash the rich’ without raising substantial revenues, and merely serving to foster the growing anti-enterprise culture in this country.

Instead, Mr Osborne must outline a ‘middle way’ via a clear, long-term vision for lower and simpler taxes, based on sound public finances and the effective taxation of wealth, rather than income.

If he succeeds, then he could secure his accession to the ranks of Neville Chamberlain and Sir Geoffrey Howe in the pantheon of great Conservative Chancellors.

Follow David on Twitter @david_cowan

What does the base rate decision really mean for your finances?

Sara Benwell 7.35am

The Bank of England announced recently that it will continue to hold the base rate at 0.5 per cent, the lowest level in its 318 year history.

This is the third year since the Bank’s decision to slash rates to this level back in March 2009 and many analysts predict that rates may continue to be held till 2015, with some predicting they could even be slashed further to 0.25 per cent. What does the base rate hold actually mean for your finances, and who are the winners and losers?

Savers

Yet another base rate hold is being heralded as a disaster for already over-squeezed British savers, whose savings continue to be hit by low interest rate returns.  Bank figures indicate that there are more than £100 billion sitting in savings accounts paying no interest at all, compared with just £15-20 billion before the financial crisis.

With the Bank of England continuing to hold the base rate, there is real concern for savers, however there may be some respite if inflation levels continue to fall as predicted – making it easier to secure a real return on investment.

For those saving in an ISA, the outlook has been less bleak.  While ISAs were hit very hard in 2010, they have since bounced back with rates averaging out at around 3%, so those savers taking advantage of their ISA allowances are continuing to make a decent rate of return.

Homeowners

While many savers have been hit hard by low interest rates, it has been a different story for Britain’s eight million homeowners, particularly those with tracker or variable mortgages.

With base rates at a record low, mortgage repayments for new borrowers have been at the most affordable levels in over a decade. Recent Moneysupermarket research showed that 23 per cent of homeowners had taken advantage of the current rates to overpay on their mortgages over the last three years. Even those taking out fixed rate mortgages have seen some benefits, though less than other borrowers.

The news that the base rate is unlikely to rise anytime soon should be good news for those with variable mortgages who would be likely to see a sharp rise in repayment levels if rates do go up. However, there has been some bad news for borrowers lately with a number of lenders ramping up the costs of some mortgages in spite of the base rate decision.  The Bank of Ireland has almost doubled its variable standard rate from 2.99 to 4.49 per cent, while Halifax and NatWest have also increased the cost of some mortgages.

Many consumers are expressing outrage that lenders are hiking rates despite the BofE decision to freeze rates for the thirty-sixth consecutive month in a row. These hikes should serve as a warning to British borrowers. The tide is turning on low mortgage rates, and people need to evaluate their finances now, before rates inevitably rise across the board.

Furthermore, households are feeling the squeeze more generally with extremely high interest rates across overdrafts and credit cards.  The average rates on overdrafts in 19.5 per cent, which is the highest since comparable records began. The Bank of England has said the average interest rate on credit cards is 17.3 percent - the highest in eleven years.

Borrowers are often heralded as the great winners of a low base rate, due to the benefits that homeowners usually see. However, as mortgage lenders begin to raise rates, and consumers are being squeezed across other forms of borrowing it’s not clear that borrowers are seeing all of the benefits that we would expect to associate with a record low base rate.

Pensions

As well as holding rates at 0.5 per cent, the Bank of England announced it would not be introducing any more quantitative easing (QE), keeping the total at £325 billion following last month’s announcement of an additional £50 billion.

The minutes from February’s MPC meeting revealed that both Adam Posen and David Miles wanted to inject £75 billion (rather than £50 billion) more QE into the economy, suggesting that more QE could be a possibility in the not so distant future.

The Bank of England has faced huge criticisms from pension funds that its policy of quantitative easing is reducing the value of annuities. Annuity rates suffer because they are linked to gilt yields, the value of which have been slashed as a result of QE.

Pensioners, along with savers, are the big casualties of the hold in the base rate, buying annuities that are worth less and will pay out less whilst struggling with the impacts of inflation.

If more QE is announced, pensioners will continue to be hit hard as annuities devalue further.

Follow Sara on Twitter @sarabenwell

A hole in our armed forces

Alexander Pannett 6.45am

It has transpired this week that despite the deep cuts imposed by the SDSR last year, there is a further £10 billion black hole in the MOD budget.  This will require either further spending cuts or increased government spending at a time of scant government resources.  It is yet another damning legacy of the mess of the previous Labour government.  The disastrous consequences of fighting two wars on a peace time budget are only now being fully realised.

It beggars belief the almost criminal mismanagement of the armed forces under Labour.  Not only did the previous government deny the right equipment for the armed forces, it also committed the MOD to spending programmes without any clear idea how they would be paid for.  Gordon Brown, as Chancellor, constantly denied funding for the services whilst committing men and women to die for foreign commitments that Labour happily took the international credit for.  Labour also palpably failed to uphold the unwritten convention between the state and the armed forces, with servicemen and women failing to receive the support they deserved on returning from active duty. 

And yet we hear Jim Murphy, the shadow secretary of state for defence, criticising the inadequacy of the SDSR and asking for it to be re-opened.  The hypocrisy is repugnant.  It follows the current Labour cry of “too far, too fast”.  Really?  Do they not understand the concept of only spending money that you have.  That books need to be balanced.  That wars should not be fought and people put in danger if you are not prepared to pay for the costs.  

Whilst defence spending should be prioritised in a time of war, pragmatism must underpin any defence review.  As usual, it is up to the Conservatives  (and Lib Dems) to make the hard choices that Labour brushed under the carpet in over ten years of government.  These decisions must take a hard look at the likely threats that the UK faces over the next decade.  Whatever choices are made, the first question that must be answered is whether there is sufficient money.  If defence spending must be increased, we must at least be open and honest about the cost of the challenges we face. We can no longer afford the financial incompetence that is proving to be the main threat to our national security.

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The Future Funding of Higher Education

Professor Michael Arthur and Wendy Piatt 9.37

The changes in the funding of Higher Education by the coalition government represent a tectonic shift in policy which has inevitably been unpopular in some quarters.  In the UK, attending university has never been an “entitlement” and successive governments have struggled with finding a funding regime with the correct balance of contributions from those who benefit.

 Moreover, the costs and benefits of providing a world class education are often poorly understood.  We live in a world in which academic excellence and world class quality is frequently, and often deliberately, confused with being elitist.  And yet, it has never been more important in this globalised world to have a university system that can generate highly skilled and creative graduates and scholars who will help create economic prosperity, as well as contributing to civil society.

A high level of participation in Higher Education (at least 40%) is important, but we must ensure that our best universities are well funded to compete at the very highest international level.  We must not invent a “one size fits all system” that will facilitate a march to mediocrity.  Lord Browne’s recommendation of no upper limit on the fee cap did not survive long.  The government’s modified proposals for England of a dual fee cap of £6,000 or “exceptionally” £9,000 (with responsibilities to ensure fair access, efficiency and provide specific course information) were right.  Any political compromise to a lower fee cap would have been disastrous. 

In the interim, there should be a much greater effort to explain that there is continued major state support of Higher Education, albeit now re-routed via the student support package, allowing the fundamentally important principle of “no up-front fee” to be maintained. Detailed knowledge is needed to comprehend that the state continues to pick up the significant long term costs of this progressive system.  Support is focused where it is needed most – on those graduates that have done less well financially.  The £21k salary threshold for triggering repayment is a critically important element – although the cost of asking graduates to repay 9% on their income over £21K should not be underestimated. 

The coalition government is to be congratulated for protecting the funding of research and science.  But now the arguments for ensuring that research funding is concentrated on centres of real excellence, rather than spread too thinly, are stronger than ever.  We also recommend the continued current successful balance of dual funding between research councils and universities.  Most importantly we want to seize every opportunity to play our crucial role in stimulating growth and making sure this country emerges from recession stronger than ever. 

Professor Michael Arthur is Vice-Chancellor of the University of Leeds and Chair of the Russell Group and Wendy Piatt is Director General of the Russell Group.  This is an extract from an article that appears in the latest edition of Reformer, the journal of the TRG.

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To boldly go where no Chancellor has gone before

Alexander Pannett 8.10am

One of the less widely reported announcements from this year’s budget was the Chancellor’s recognition of the success story that is the British Space Industry.  The government has pledged to provide more funding to the industry and introduce regulatory changes that will allow British space companies to compete on a more level playing field against their international competitors.

The words “space” and “British” brings up memories of rainy school trips to the Science Museum and ageing Dan Dare comics that postulated a future of green alien antagonists and heroic spacemen in dated second world war bomber jackets.  In fact the UK’s first serious foray into the final frontier in the 1950s involved a primitive rocket called “Blue Streak”, which sounds more like a juvenile party trick than an inter-galactic spacecraft.  This was eventually cancelled due to budgetary cuts and things became so bad for the UK space industry that the Thatcher government even refused to pay for the training of British astronauts at the European Space Agency.  For years it seemed that the only meaningful British presence in space would be the clipped British accents of the evil Imperials in the Star Wars franchise.

But the reality of the UK space industry today is a very different place from its meagre beginnings.  Over the past decade space has become a medium-sized industry in Britain, with revenues of about £7.5 billion in 2008-09.  Further, the space sector has grown during this time by 10% a year on average, including at 8% growth during the worst recession in decades.  There are nearly 260 companies in the UK space sector and it is home to some of the world’s leading manufacturers of small satellites.

George Osborne has pledged £10 million to be part of a larger £100 million project to start a National Space Technology Programme.  This will support the development of space technology, which should further stimulate the industry.  The government also plans to make changes to legislation, which would see the Outer Space Act of 1986 updated to allow an upper cap on the liability of UK space companies.  This is in response to the long-term criticism that UK legislation has prevented the expansion of space operations because currently the liabilities of companies are unlimited, making insurance premiums more expensive for British companies than their international competitors, effectively pricing them out of the market.

Competition is increasing from Brazil, China, India and South Korea, which all have government-subsidised space programmes. But British companies’ head start and access to City funding should help strengthen their lead. The government is right to support this industry, especially as it seeks to re-balance the economy away from the services sector and towards manufacturing.  A new space-business incubation centre will soon open at Harwell near Oxford. The new UK Space Agency, intended to co-ordinate space science, Earth observation and technology development, has been launched today and will be fully functioning next month. It aims to increase Britain’s market share in space from 6.5% to 10% by 2030.

As voyaging into the unknown made Britain the trading nation it is today it is heart warming to see a successful new industry emulate the commercial spirit of Britain’s adventurous past.  Now all we need are some Spanish treasure spaceships to plunder and we’ll have this deficit paid off in no time…..

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