AS USUAL, in spite of the advance hype, the Budget was a non-event in macro-economic terms. The net effect of the chancellor’s changes was to increase spending by £1.3bn this year on a total spend of £720bn, a statistically insignificant 0.18% climb.
But the statement was important for several reasons. Some of the tax changes are undoubtedly significant to some groups and businesses. And the projections of deficits and national debt to 2018 show the high price George Osborne is paying for slow growth. The deadline for achieving the targets he set himself in 2010 is again being pushed back and is now in the middle of the next parliament. And finally, his measures to boost the housing market, and to cap rises in the cost of beer and petrol, show he is looking to the consumer to stimulate activity rather than exports and investment – the much-vaunted re-balancing he talked about in previous budgets.
But perhaps a key message of the Budget, although the chancellor did not exactly say so, is that he has played his best cards and the scope for fiscal policy to kickstart the economy is now very limited. Short of stoking up even more borrowing, there is little he can do. So it is to monetary policy that the government must look for a boost, and in this context a change at the top of the Bank of England assumes even greater significance.
After two terms in the job, Mervyn King, the rather donnish governor, is making way for heavy metal fan and Don Draper look-alike Mark Carney, who, despite being imported from Canada, claims to be an Everton fan. This probably happened when he was working in the UK for Goldman Sachs because, although as academically impressive as his predecessor, Carney has done his time in the private sector.
While there are obvious differences in style, is there much room for serious differences in substance? The outgoing governor has had his critics, particularly in the run-up to the recession where he seemed to mis-read what was happening. Then the worst recession since the 1930s and an unprecedented banking crisis hit the UK, during which King pulled out all the stops. Interest rates have been at the lowest since the Bank of England was formed in 1694 for four years and £375bn of new money has been pumped into the economy through quantitative easing. All the conventional levers and a few new ones were pulled.
The suggestion has been made that the new governor should have a more flexible objective than the current inflation target, perhaps one related to nominal GDP (real growth as well as inflation) or employment. But this begs the question of how much more flexible King could have been. For more than two years, the CPI was above the upper 3% limit, but despite calls from some of his fellow MPC members, the governor left interest rates on hold. He effectively ignored the target. This was for fear of damaging the nascent recovery, which showed growth was his priority. It is not clear, moreover, how the Bank of England is meant to generate spending, other than by QE and historically low interest rates.
The UK’s sluggish growth is attributable to the huge build-up of consumer and public sector debt, which occurred during the previous Labour government and the malfunctioning financial sector, the weak regulation of which pre-dates the last election. Although Osborne did little in his Budget to stimulate demand, there is little more he could do. Time is key, to unwind the debt and rebuild confidence.
Looking to the new governor of the bank is a neat piece of political footwork by the chancellor but will have no magical effect. By Christmas, once the fanfare of his accession has worn off, Carney might be wondering just what sort of job he has taken on.
Dennis Turner is the former chief economist at HSBC
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