UK: In Time, the Budget Will Fuel Recovery

A chancellor who cuts the 50p top tax rate, reduces corporation tax to 22% (with an ambition of getting to 20%), and takes 840,000 people out of tax by raising the personal allowance, might expect to be garlanded.

Instead, George Osborne finds himself lambasted by the Tory press, criticised by the think tanks and scared of going out at night for fear of being pelted with Werther’s Originals by irate pensioners.

Many people have asked how the Treasury could have found itself in this pickle. Why leak all the eye-catching announcements in the budget, while leaving the £3 billion “raid” on pensioners by taking away age-related allowances to grab all the headlines on the day itself? When even Labour accuses you of stealth taxes, you know something’s up.

I think, without giving away any trade secrets, there were two reasons. One was that the pre-budget leaks were not part of some carefully-planned Treasury strategy.

Treasury people are naturally secretive: left to them the most that would have come out in advance would have been localised public sector pay bargaining, relaxing Sunday trading for the Olympics and a 100-year gilt (government bond).

But budgets these days are collegiate affairs. Gone are the days when Gordon Brown kept it secret from Tony Blair until the day before. And the more people that know, from the prime minister through his chatty Liberal Democrat colleagues, the more likely things are to get out.

I also think the Treasury, and in particular Osborne’s key adviser Rupert Harrison, did not see the pension changes as very controversial. As an alumnus of the Institute for Fiscal Studies, he probably agreed with its verdict of “a relative modest tax increase on a group hitherto well sheltered from tax and benefit changes”.

So was it a good or a bad budget and what did it tell us about the government’s fiscal strategy and the economy?

Let me get two things off my chest. Unless things improve suddenly, I owe the Office for Budget Responsibility an apology. Since November, when it revised up its projection for public borrowing this year from £122 billion to £127 billion, I have been calling that decision into question.

The monthly numbers, which were pointing to a significant undershoot – the talk was of £120 billion or below – backed my judgment. Then, as it is wont to do, the official statisticians bowled a googly on the morning of the budget.

Thanks to a splurge of spending by government departments, borrowing hit a record £15.2 billion in February, more than £6 billion up on a year earlier and double City expectations.

A nice chart in the Treasury’s budget document shows the 12-month rolling total for borrowing neatly trending down to £120 billion from a peak of nearly £160 billion at the time of the election.

Unfortunately it did not include the February numbers, which have that rolling total jumping back up to £128 billion. Some of that may be unwound in the March data. But as it stands there is no undershoot of any significance: a token downward revision by the OBR of £1 billion to £126 billion.

There is a big drop in borrowing on the way, with a predicted £92 billion for the coming year, 2012-13. It would, however, be £28 billion higher if not for the transfer of Royal Mail pension fund assets to the public sector. Borrowing for 2013-14 goes back up to £98 billion. Borrowing over this parliament is officially put at £528 billion. It is moving in the right direction but averages more than £100 billion a year.

Borrowing is proving more intractable than the last time Britain was faced with budget deficits on anything like this scale; in the early 1990s. The virtuous circle then, of rapid recovery leading to a quicker fall in borrowing, is not happening yet.

I still do not see that the answer to uncomfortably high borrowing is more of it. The government’s critics offer two versions of the fiscal stimulus story. One is the temporary tax cut through Vat or National Insurance. The other is infrastructure spending, perhaps funded by issuing special bonds.

Neither stacks up. A temporary tax cut adds more to borrowing than it would add to gross domestic product and, because it was temporary, would reduce growth in future when reversed. Issuing infrastructure bonds to fund capital projects is a nice idea but it would still represent more government borrowing. Growth will come but there is no easy way of forcing it.

That brings me to the second thing to unburden myself of. A lot of commentary on the budget was that none of the tax cuts, whether for corporation tax, the 50p rate or raising the personal allowance, can amount to much because the official forecast is barely changed from November.

Apart from the fact it is a minor triumph to have had no forecast change since the autumn, this is not how forecasting works. The budget was broadly fiscally neutral, a £1.9 billion giveaway in 2012-13 and just under £1 billion the following year, clawed back in later years. A neutral budget, if plugged into an economic model, unsurprisingly does not affect growth much.

It is disappointing business investment is so weak. The OBR forecast of just 0.7% growth this year because of eurozone uncertainty compares with nearly 8% at the time of the budget. But it is ridiculous to say this reflects a failure of the corporation tax cut, which is singled out as factor likely to raise investment over the medium term. The OBR still expects a 40% rise in business investment over the next 4-5 years.

What are we left with? Even the chancellor’s best friends would not describe what we had as a bold, tax-reforming budget. Coalition budgets, as well as being leaky, will always be messy compromises.

But the signals it sent out were nevertheless important ones. Anti-business sentiment has threatened to take over in recent months. Osborne’s third budget was a corrective to that, in words and in some deeds. As a means of levering the economy into stronger growth in the short term, it made little difference. As a budget to provide a platform for stronger, business-led growth in the medium and long-term it might yet prove its worth.

My regular column is available to subscribers on This is an excerpt.

This post originally appeared at David Smith’s EconomicsUK and is posted with permission.

One Response to "UK: In Time, the Budget Will Fuel Recovery"

  1. burkbraun   March 25, 2012 at 10:18 pm

    Oh, right- fiscally neutral, as in … take from the poor and give to the rich. I get it.

    More substantively, "A temporary tax cut adds more to borrowing than it would add to gross domestic product and, because it was temporary, would reduce growth in future when reversed."

    But the UK needs growth *now*, not in the future. If growth happens now, things will heat up in the future, and taxes can be raised then and expenditures and borrowing reduced then. I think you had an economist who clarified all this many decades ago, …