So, was it one of those budgets that will last about as long in the memory as the spring daffodils, or was it more enduring than that?
In the two pieces I wrote ahead of Wednesday’s budget, one said there should and could be no big giveways given the state of the public finances. The other, last Sunday, said the budget must be firmly focused on lifting Britain’s dismal productivity performance.
Though the Institute for Fiscal Studies rightly pointed out that the budget was not quite as neutral as claimed, because small giveaways now are funded by unspecified spending cuts later, my judgment is that Osborne passes the “no significant giveaway” test.
Not only that but, apart from the pledge to raise the personal allowance to £10,500, and maybe even including that, these modest adjustments (which added up to a net cost of just over £0.5bn in bother 2014-15 and 2015-16) fell into the “good giveaway” category.
You cannot be too hard on a budget which doubles the annual investment allowance to £500,000 and increase incentives for savings, with a new ISA limit of £15,000 and, as touched on here ahead of the budget, no limit within that on how much can be put into a cash ISA.
Some, like the shadow chancellor Ed Balls, argue it cannot have been a budget for saving because the Office for Budget Responsibility is predicting a drop in the saving ratio from 5% last year to 3% by 2018. But this misunderstands the saving ratio. It is falling, not because households are saving less, but because some are borrowing more. It was a budget for saving.
It was also, and this is where it should make it into the pantheon of memorable budgets, a big reform of pensions. Freeing people from the prison of annuities carries some risks, but these will be greatly outweighed by the benefits.
Was it a budget for productivity? The increase in investment allowances for firms, and the OBR’s prediction of annual rises in business investment averaging more than 8% over the next five years, will help lift productivity. There were bits and pieces on apprenticeships and other measures, dotted around the budget, that will help at the margin.
But this was not a budget for productivity in any meaningful sense. For the moment, the chancellor seems happier that employment is rising – and predicted to continue to do so – than that productivity rebounds.
Though the OBR predicts a gradual pick up in the growth of productivity, output per hour, as the economy strengthens, itr also warns that productivity growth “remains below the rate consistent with historical trends throughout the forecast”.
That forecast, which extends until 2018, may be wrong. But the OBR’s argument, that damage to the financial system is preventing the allocation of capital to more productive use, has merit, and was not seriously addressed.
What about the balance of the recovery? After a three-year interlude in which he was keener for growth, any growth, than the nature of that growth, the chancellor was able to return to his 2010 agenda of trying to secure a more balanced recovery.
I was gratified to see the Treasury, in its analysis, take up some of the themes and numbers that have featured in recent columns here. So it noted, as I did, that the annual survey of hours and earnings shows that people in continuous employment – around two-thirds of all employees – have seen above-inflation pay increases in most recent years.
It also picked up on, as I have done, the myth of a consumer-dominated recovery driven by debt. Consumer spending’s contribution to growth has been lower than its long-term share of the economy and similar to previous recoveries. Business investment has kicked in over the past year.
In my pieces on this I emphasised that the export shoe has yet to drop. The Treasury is a bit more circumspect, focusing instead on more generous export credits and lower tax rates on flights to some of the more promising export markets outside Europe.
But the OBR was clear. Not only has the export shoe not dropped, but it will never do so. the new official forecast is resolutely downbeat on the contribution of exports to recovery. This, if the OBR is right, is a home-grown recovery, and not in a good way.
The OBR has revised down its forecast for export growth this year from 4% to 2.6% since December. Even when export growth picks up to 5% from next year onwards, it will be slower than the growth in world trade.
One of the saddest charts you can draw, Britain’s share of world trade is stuck firmly in a downward trend. Britain’s trade share dropped by a fifth between 1998 and 2010, and will drop by a further tenth by 2019.
The contribution of net exports (exports minus imports) to growth will be negative by 0.2 percentage points this year and, in what looks like a decisive burying of the prospects for export-led recovery, the OBR notes that “net trade is expected to make little contribution to growth over the remainder of the forecast period, reflecting the weakness of export market growth and a gradual decline in export market share”.
This is all a bit depressing. It has been possible to put export disappointment in recent years down to the eurozone crisis and exporters choosing to widen their margins when sterling fell rather than chase market share. Now the pound has recovered some losses, providing another excuse for export weakness.
The export malaise goes deep if the official forecaster is to be believed, and the budget measures did little to address it. We have to hope it is too gloomy about Britain’s external trade. If not, we need a change of export culture. Until we have it, we will wait in vain for that export-led recovery.
This piece is cross-posted from EconomicsUK.com with permission.