George Osborne gave his budget speech having seen his economic credibility eroded over the past year, although he remains in a stronger position than the circumstances suggest he ought to be. Growth was promised as the reward for harsh austerity but it has yet to arrive. The Office for Budget Responsibility has once again revised down its forecasts for economic growth. A peculiar thing is that Labour has not benefitted yet from the risks he has taken with the economy. The real detail of the budget only emerges as we study the documents closely, but in the meantime there are some conclusions we can draw.
The UK economy barely grew last year. Growth in the domestic economy was offset by a poor trade performance. Unemployment remains stubbornly just under eight per cent, but employment growth is comparable to the last recovery. Productivity appears to have fallen substantially. The OBR, in its report accompanying the budget, is not optimistic in the short term. A year ago it believed the economy would grow two per cent in 2013; it now believes it will grow only 0.6 per cent. It has also revised down its forecast for 2014, from 2.15 per cent to 1.8 per cent, but kept its later forecasts unchanged (I believe there is potential for growth to surprise if household and business confidence can be boosted). We should recall this lower growth is being combined with stubborn inflation and very little wage growth, squeezing living standards.
The OBR concluded in December that the commitment to be reducing net debt by 2015-16 would not be met and this has been underlined today since it is not expected to be lower until 2017-18. Lower growth will raise borrowing (by £13bn in 2017-18) which will make it more difficult for the government to meet its target of balancing the cyclically adjusted budget over a rolling five-year period. However, budget measures correct the situation to some extent so the target is still expected to be met. Of note is that lower growth means the government is taking the opportunity to cut the international development budget while retaining its commitment to devote 0.7 per cent of gross national product to aid. Worth closer attention too is an impending cap on annually managed expenditure, for which read welfare spending, with details to be announced in the summer.
Amid this depressing backdrop, the chancellor announced a number of measures designed to boost growth. Underspending by departments will be factored into future spending plans and funds redirected to capital spending to fund infrastructure projects; an acknowledgement the government has got it wrong on investment. Corporation tax will be cut further. A significant move was to increase the personal tax allowance faster than previously announced, which should on the margin enable higher household spending or faster deleveraging. However, the OBR has concluded that the net impact on growth of the measures announced in this budget is negligible in the short to medium term.
There was little mention of the Funding for Lending Scheme, which genuinely promises much but has so far delivered little, though the government is considering extending it and some further help for the mortgage market was announced. However, the chancellor announced some adjustment to the MPC’s remit, allowing it more flexibility in meeting its two per cent inflation target and requiring it to pay regard to any strains in the financial system. It will mean the Bank of England can take longer to hit the target as long as it has a good reason, but February’s inflation report already saw the MPC moving this way within its existing remit. Whether or not these changes will ultimately boost growth remains to be seen.
There was very little room for manoeuvre in this budget. The chancellor has managed to redirect some funds from current spending to investment but nothing like on the scale that is required. The last budget was accompanied by a growth plan, as was the autumn statement which preceded it in 2011. The problem is that government should have committed to further economic stimulus after the 2010 general election within the constraints of a credible fiscal plan. Instead it talked austerity and helped dampen confidence. The situation now is different to 2010 and so our politics have to change too. Another short-lived stimulus will probably have a limited effect. Neither do we need yet another half-hearted growth plan, or to only cut spending more slowly and for longer. Yet all these options could be our lot in the years to come unless bolder options are sought to avoid protracted stagnation. New fiscal rules should permit a boost to borrowing at current low rates for capital projects and there should be a decade-long commitment to upgrading infrastructure and education standards.
From Labour’s point of view, the grim outlook presented with this budget is a vindication of its view. The commitment to so much austerity is an abdication of government responsibility to manage actively an economy which is not growing. Yet there is the potential for the economy to do better than everyone expects right now. The Funding for Lending Scheme has increased the supply of credit, but households and businesses are either paying down debt or hoarding cash. An increase in confidence in the future could see a boost to economic activity take place, especially if global growth picks up. Even if the economy’s trend rate of growth is now well below the 2.25 per cent seen in the 50 years before the recession, we should still expect some quarters of much stronger growth. This would take place in spite of the reckless approach the coalition has taken. That will not stop Osborne from taking the credit and declaring his policies justified. It might take until after an election to discover that the fundamental problems remain. Labour therefore needs to describe how its One Nation politics are right for the economy in better times as well as bad.
Stephen Beer is senior fund manager at the Central Finance Board of the Methodist Church and author of the Fabian pamphlet, The Credibility Deficit – how to rebuild Labour’s economic reputation. This article represents his personal opinion.
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