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A political Budget

THE RULES OF government and economics have shifted subtlely over the years. In previous generations, two chancellors, Jimmy Thomas and Hugh Dalton, were forced to resign because of indiscreet leaks of Budget details, in Dalton’s case because of a casual remark to a journalist on his way to make his speech in the Commons. When George Osborne delivered his Budget last month, there were no surprises. Virtually everything had been trailed in advance. Second, the Budget is no longer the pivotal instrument of economic management. It made an overall difference of less than £0.5bn to an economy worth £1.5tn. Today, the Budget is more about politics and the longer-term direction the authorities want to take. Far more important than the Treasury and fiscal policy as a regulator of short-term activity is the Bank of England and monetary policy.

But the Budget still matters for what it says about the growth of the economy and the balance of activity between public and private sectors, between personal and corporate sectors, between domestic activity and exports, and so on. The immediate headlines as usual were about the winners and losers in terms of income groups or age groups, essentially the political small change of the Budget. But to economists, the Office for Budget Responsibility’s (OBR) forecasts are of special interest, as is the extent to which the chancellor’s measures support the outlook. And here there were signs that the economy is moving in the right direction.

After the unrelieved gloom in November’s Autumn Statement, the Budget increased modestly the forecast for growth this year with an expectation of a much stronger performance in 2013. By the second half of next year the prospect of trend growth is in sight. This optimism does not seem misplaced. Business surveys have been sending more upbeat signals than the official data and consumers, industry and exporters have all been showing signs of real activity. Even the long-moribund housing market (prices, viewings and mortgage approvals) seems to be coming back to life.

As important is the fact that the OBR’s growth profile shows the right sort of growth and the rebalancing that is so necessary. Rather than depend, as the UK has done so often, on households and governments spending and borrowing to create demand and jobs, much larger contributions are likely to come from trade and investment. The fact that the global economy is on the mend will undoubtedly help. The US at last seems to be responding to the authorities’ massive fiscal and monetary easing and, now that the ECB is learning how to behave like a central bank, there are hopes the situation in the eurozone will at least stabilise.

An important, unchallenged assumption in the Budget is the continuing downward drift in inflation. From an annual rate of 4.5% in 2011, the increase in the Consumer Price Index (CPI) is expected to be less than 2% next year. This will boost consumer spending power and end any argument for higher interest rates in the near term. This should provide the platform for the corporate sector to lead the UK forward.

The chancellor resisted calls to reverse his public sector spending stance or to stimulate the personal sector. What he gave households in general with one hand, he took with the other. Rather, it is corporate Britain, which is in good financial shape, that needs to start spending the money it has been accumulating. After years of decline or standstill, the conditions are right to step up investment, so when recovery gets into gear, companies can hit the ground running. The balance of the Budget measures favoured companies over households, the private sector over the public, and for all the political criticism of the package, it looks as a whole to be a small step in the right direction. ?


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