Standing at the dispatch box on 23 March, George Osborne presented his budget as ‘reforming the nation’s economy, so that we have enduring growth and jobs in the future’. The sheer audacity of this claim, when the independent Office for Budget Responsibility has just slashed its projections for both growth and jobs, is startling. And while the chancellor’s second budget may have been long on measures, it was short on a big vision to transform Britain’s economy.
The headline figures on growth are worth repeating. In their first forecast before last June’s budget, the OBR predicted growth in 2011 of 2.6 per cent. This fell to 2.3 per cent following the budget, 2.1 per cent in their autumn forecast, and is now 1.7 per cent – a third lower than what was expected just 10 months ago. And, despite this dreadful track record, the OBR persists in assuming that growth will rebound to close to 3 per cent in 2013, 2014, and 2015 with heroic assumptions about the contribution to be made by investment and net trade.
The unemployment figures – conspicuous by their absence in Osborne’s speech – were even worse. In the OBR’s pre-budget analysis last June, it predicted that the claimant count (the lower measure) would fall steadily from 1.6 million in 2009 to 1.1 million in 2014. They now project that unemployment will be 140,000 higher in 2011, and 230,000 higher in both 2012 and 2013.
Since he was unwilling to contemplate a slower deficit reduction plan or a ‘Plan B’ to offset the detrimental impact on growth of rapid cuts, the chancellor was forced to produce a fiscally
neutral budget.
This meant he had to fall back on the three favourite standbys of the last Labour government to finance his giveaways: a clampdown on tax avoidance, a windfall tax, and a stealth tax. By reducing tax avoidance he hopes to raise an additional £1 billion. Increasing the supplementary charge on North Sea oil and gas production raises a further £2 billion (but may end up costing thousands of jobs). And the shift to indexing tax allowances by consumer price inflation rather than (the usually higher) retail price inflation – the stealth tax – raises another £1 billion by 2015-16. Together with an extra £630 million from the bank levy, it allowed the chancellor to announce a few giveaways.
The £630 rise in the personal tax allowance from April 2012 and a cut in fuel duty will help hard-pressed families a bit (although not those that find themselves out of work, earn less than £7,500, or do not own a car). But they fade into insignificance relative to the effect of higher inflation which will mean that a typical middle-class family will see their disposable income fall by more than £1,500. Set against this, the extra £48 a year from the tax change looks pretty derisory.
Alongside the budget was an even longer document entitled The Plan for Growth. Despite the length, the document seems unable to comprehend that Britain’s economic model needs a radical rethink. Instead its thinking is best characterised by ‘something borrowed, something blue’.
The Tories put true-blue Thatcherite cuts to corporation tax and regulation front and centre of their growth agenda. Given that Britain already has corporation tax rates lower than the G7 average, a race to the bottom does little but transfer the tax burden from firms to individuals. And while it may encourage the odd business to switch their head offices back to the UK, bringing in a little extra revenue to offset the lower rates, the jury is out on whether it’s the best pro-growth use of several billions of pounds. Meanwhile, the Organisation for Economic Cooperation and Development’s index of employment protection shows that only the US and Canada have fewer regulations. It therefore seems unlikely that another scissor attack on red tape will give a substantial boost to growth.
From the Blair-Brown era, Osborne borrowed warm words on supply-side measures around investment, exports, and skills but offered little more than a shopping list of ineffective proposals. Research by the Work Foundation shows that Enterprise Zones could cost £50,000 per job and will provide few lasting benefits. The chancellor trailed ‘new capital allowances for manufacturing’ by doubling the limit for short life assets from four years to eight years. But these changes will only undo a fraction of the damage caused by last June’s decision to reduce capital allowances by £2 billion. Similarly, the positive-sounding £100 million investment for science is just a one-off and will only partially offset the real-terms cuts which were announced in the spending review, while the research and development tax changes will benefit fewer than 7,000 businesses.
One genuinely new policy is the welcome news that the Green Investment Bank will be capitalised with £3 billion. But the bank won’t be able to raise debt until 2015-16, meaning that any attempt to close Britain’s chronic green investment gap, estimated at anything between £10 billion and £40 billion per year, will have to wait until after the next election. And while the new carbon floor price may bring in some extra revenue for the Treasury, it won’t do much to cut carbon without changes to the number of European Union-wide emissions permits. So much for the ‘greenest government ever’.
History will judge this essentially political budget on whether the OBR’s optimistic growth projections turn out to be true. The leading credit-rating agencies, much lauded by the chancellor in his last budget, are now warning that persistent slow growth will jeopardise Britain’s AAA status. Osborne’s future – and in all likelihood the outcome of the next election – will depend on whether his Plan A turns into a Plan G for growth.