Though his second one was simpler and less controversial than the first, George Osborne’s latest Budget speech in March did contain some signposts to his medium-term intentions. Fiscally, he had very little room for manoeuvre, and he still has a long way to go to achieve his ambitious targets for the deficit. And, as the latest figures for economic growth have made very clear, activity is still weak, even before the chancellor’s spending cuts kick in.
The fact that the Budget changed the government’s fiscal stance by a paltry £10m (on a projected spend of £710billion) meant it was as close to neutral as to make no difference. Yet the speech showed clearly the direction in which Osborne wants to move. Unsurprisingly, his commitment to repairing the public finances by getting the current account back into balance and reducing the debt has not wavered. He cited the approval of several international agencies for his stance, which has allowed the UK to continue borrowing at very favourable rates, more so than the heavily indebted countries in the eurozone.
But whereas the 2010 Budget was about debt and past failures, this speech was about growth and future opportunities. Osborne tried to convert the concept of rebalancing the economy into policy ideas admirable for their ambition, if not their feasibility. He wants to build on the rise in manufacturing activity since the end of the technical recession. This means the UK having the most competitive tax system in the G20, being the best place in Europe to start, finance and grow a business, and having a more educated, flexible workforce. Any steps he was able to take in this direction were largely paid for by the banks and oil companies.
Yet the language of an “enterprise-led economy” was at odds with the Office for Budget Responsibility’s (OBR) new forecasts for the UK. The irony of the chancellor presenting a “Budget for growth” while reducing his GDP forecast was not lost on the leader of the opposition. Output growth has been pegged back to 1.7 percent (from 2.1 percent) while inflation and unemployment are expected to be higher than projected last November. Given the negative Q4 number for 2010 (now confirmed at -0.5 percent), this was not surprising, but the more positive outlook for subsequent years has not really been revised.
Rather more worrying than the adjustment to the overall GDP rate is the OBR’s forecast composition of growth. The combination of inflation and slow increases in earnings is adding to the personal sector’s fragility, so consumer spending has been pegged back. The hoped-for revival in business investment is not yet happening, and, with imports expected to grow faster this year, Osborne can be under no illusion about the difficulty he faces in rebalancing activity. This is underlined by the fact the major upward revision to the 2011 forecast came from the public sector. Like the Thatcher government a generation ago, Osborne may find that controlling government spending is more difficult than he first thought.
With consumers and the public sector boxed in, corporate Britain holds the key to recovery, which the chancellor recognised. So the reduction in corporation tax, the changes to planning laws, the promised reductions in regulation, the hope that the 50 percent income tax band is temporary – these were all nods in the direction of the business community. Companies are in reasonable financial shape, but reluctant to spend. Confidence is the missing ingredient and Osborne must hope that his speech, largely a statement of intent, will tempt business into action.
Each depends on the other. The chancellor’s agenda will create a supportive environment for business, but he will miss his targets and be unable to implement his policies unless business is spending. We are all in it together: not only in paying for past mistakes, but also in exploiting the future opportunities Osborne wants us to believe will be forthcoming.
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