First, the economics. The OBR halved its forecast for growth this year to just 0.6%, and also indicated that borrowing would increase over the medium term. UK public net debt in 2015-16 will be £60bn higher than forecast in December. Alongside a higher structural deficit figure of 2.8% of GDP in 2013-14 – rather than the 2.2% forecast in December or the 0.7% forecast in June 2010 – these figures provide a grim economic backdrop for a Chancellor that told the country he would lead them to economic safety in 2010.
Despite these figures, Osborne has stuck with his ‘Plan A’ (as expected), and hasn’t opted for a fiscal stimulus like increasing borrowing (which is broadly Labour’s argument), although it’s worth noting that he’s now committed to more capital expenditure than the opposition. That means he’s heavily dependent on monetary stimulus, but – and here’s where it gets interesting – he knows that the Bank has little room for manoeuvre because not only are interest rates already at historic lows but QE is also running out of steam and could soon become politically difficult.
That’s why it’s a hugely important signal of intent that the Chancellor has changed the remit of the Bank of England: a move that could see the Bank enter unchartered territory and become the main mechanism by which the Government pursues growth. Whether this will work is unclear, but one thing is for sure: the already influential Mark Carney is going to become one of the most powerful men in the world when he takes over as Governor of the Bank in June.
It’s clear, however, that the Chancellor will be regarding his Budget as a political success, in spite of the OBR’s economic gloom and the uncertainty over just where growth will come from. In the context of last year’s omnishambles this is certainly the case, but this Budget stands on its own merit, with a hugely popular cut to beer duty and the removal of a planned increase in fuel tax. He also echoed Thatcher by announcing extra support for people trying to get onto the property ladder – a policy that tangibly demonstrates his stated commitment to “aspiration”. Furthermore, he scored political points – which will be fought over by the Lib Dems – by bringing forward the increase in the personal income tax allowance to £10,000 by a year.
His attempt to please the general public was accompanied by a concerted effort to get businesses on side as well. His £2,000 National Insurance allowance was strongly welcomed by businesses associations, and the further cuts to corporation tax will be seen as a real statement of intent, giving the UK the lowest rate of any major economy. Other measures, like the abolition of stamp duty on shares traded on growth markets like AIM, will be similarly well-received.
It is true that Osborne will continue to come under political pressure from within his own party, where a number of MPs are keen for him to slash taxes and regulation to boost growth. The Chancellor will also face a concerted effort from Labour to undermine his economic credibility. This job is made easier by the poor growth forecasts, but it remains a mammoth task for a Labour party still tainted by its role in the recession and the fact it’s not yet developed a detailed alternative economic policy. He’ll also – despite pleasing many businesses – quickly come under more pressure from them to generate growth.
But these criticisms would have been there whatever Osborne said today, as he is politically wedded to ‘Plan A’ regardless of the country’s growth figures. So – while the short-term economic signs are far from good and the Chancellor will be under no illusion that the economy has to improve before 2015 – it’s clear that he’ll be pleased with his performance despite being shackled by very tight political and economic constraints.
He was formerly Head of Policy at the Society of Trust and Estate Practitioners (STEP). With degrees in history and economics from the Universities of Oxford and London, Jake is a Fellow of the Royal Society of Arts, a trustee of the European Association of Philanthropy and Giving and advises several governments on public policy. He also advises clients on CSR and philanthropy activities.
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