Many of today’s Budget measures were the result of political horse-trading between coalition partners. But in the end they did nothing to promote growth
Today’s Budget was a missed opportunity. The UK economy has a growth problem caused by a lack of demand. The government is cutting public spending, households have been squeezed by high oil prices (these are still going up) and businesses are sitting on massive cash piles because of the uncertain outlook for demand.
The OBR revised up its forecasts for growth in 2012 fractionally, from 0.7% to 0.8%, but it revised down growth in 2013 from 2.1% to 2.0%. These are hugely disappointing numbers and mean real GDP will not return to its previous peak until the final quarter of 2013.
If the chancellor had been willing to relax his deficit reduction plan, he could have boosted demand directly by increasing government spending or by introducing net tax cuts. But this was never likely to happen because of his past commitment to austerity. Any hint of a slower pace of deficit reduction would have been fatal for the government’s political credibility.
He did though have other alternatives. The measures announced to restrict tax reliefs for high earners are welcome but taxes on the wealthiest could have gone up more – for example through a 1% mansion tax on the value of homes above £2 million. This would have a small effect on aggregate consumer spending. But the proceeds could have been used in ways designed specifically to boost the economy: an increase in spending on infrastructure, a jobs guarantee for young, long-term unemployed people or a temporary cut in employees’ national insurance contributions.
Instead, the Budget is the result of horse-trading between the two parties of the coalition – largely conducted in public over the last few weeks. For the Liberal Democrats, a bigger than previously announced increase in the personal tax allowance; for Conservative backbenchers, a cut in the top rate of tax from 50p to 45p in the £. For Liberal Democrats, restrictions on the tax reliefs of the wealthy; for Conservative backbenchers, an accelerated cut in corporation tax. For Liberal Democrats, increases in stamp duty on houses valued at over £2 million; for Conservative backbenchers, relaxations in planning rules and employment law.
But overall, as the Chancellor admitted, this was a fiscally neutral budget. It will do very little to address the problem of weak demand in the economy and as a result, the OBR expects growth to remain disappointing in 2012 and 2013.
Tony Dolphin is senior economist at the Institute for Public Policy Research