Budget 2013: Plus ça change…
The weeks leading up to the budget have been a tumultuous time for the Conservative party. A by-election has been and gone, as has Britain’s AAA credit rating, and the public discussion about the Prime Minister has swung from how he chose to implement the proposals in the Leveson Inquiry to what he can organise in a brewery. In amongst this, it can be easy to forget that Britain’s economic path has remained basically unchanged since George Osborne ascended to the role of Chancellor. His talk of ’steering Britain through tough waters’ often implies that he views his role as that of the captain of a ship. That he signalled his desire to keep heading along the same bearing in this Budget will do nothing to change the perception of him as either Columbus or Blackbeard, depending on political persuasion.What was surprising about Budget 2013 was just how little of it was a surprise, and not only because the Evening Standard had contrived to reveal the entire thing before the Chancellor had spoken a word. Most of it had been announced by the Treasury beforehand, in part to prevent any market uncertainty and gauge public reaction. However, the prediction was that Mr Osborne might pull a rabbit out of the budget box, for he appears to be someone who enjoys playing the political game. Anyone who caught the first half of his speech might have been forgiven for mistaking it as a party political broadcast. Therefore, there were no surprises for Labour to deal with, though as usual plenty of what he said seemed to agitate the Shadow Chancellor.
A lot of the measures were targeted to boost consumer confidence. There was no income tax rate cut, but the threshold will be raised to £10,000 in 2014, a year earlier than planned. There is a 1p cut in beer duty but the ’escalator’ will remain for cider, wine and spirits. More crucially, the oft-postponed planned fuel duty rise has been frozen. Given that 800,000 households currently spend more than a quarter of their income on operating a vehicle (according to the RAC foundation), it is likely to be a welcome boost. This, combined with the personal allowance increase, will provide relief to battered ’hard working families’. Inflationary pressure in the economy is increasing, with the pound falling and energy bills shooting up, while wages continue to remain fairly flat. Workers’ real wages have declined by 1% a year on average since 2008 (and with public sector pay capped at 1% until 2016, it looks like this trend will continue). Moreover, people are saving more of their declining earnings than is beneficial to the economy. The Chancellor will hope that his plans will spark some more spending by private households (which accounted for 63% of GDP in 2012). However, these positive but relatively small measures will not be enough.
Many of the announcements were designed to woo businesses into investing. The low investment stems from contrasting problems; big businesses are sitting on large cash piles as they sense the chill winds sweeping consumer confidence, while small and medium enterprises who rely on the banks for funding have found prying credit from them extremely difficult. To this end, the Chancellor plans to give small businesses a £2000 allowance to offset against their National Insurance bill from April 2014. Corporation tax will fall to 20% by April 2015, 1% lower than previously planned. These plans have been met by encouraging words from the business world, though struggling small businesses will wonder why they will have to wait for so long for relief in a tough economic climate when a cut in the rate of VAT could have been implemented fairly quickly. More could be done; talk of improving the Funding for Lending scheme, which was extended today, and progress in setting up the ’Business Bank’ are both welcome. On the other hand, whatever the Chancellor managed to contrive from the constraints that he faces, it would have been ineffective in combatting the problems that British businesses face. No analyst can adequately explain why productivity is so low or predict when big companies will resume spending. Though it would certainly help if growth is finally enticed out of the economy.
A way in which a spending increase could bring considerable dividends is through infrastructure. The Chancellor does not appear to accept this view. An increase here would be beneficial for two reasons. Firstly, borrowing costs are low (real interest rates are negative), so there is the sense that this is an opportune moment to spend. Secondly, unlike other areas of spending, government injections into capital projects are more likely to have a positive feed through to the rest of the economy. The OBR estimate that the fiscal multiplier for capital spending is 1%; for tax cuts and government spending it is only 0.4%. The government could provide considerable relief to the economy by spending wisely now rather than later, when it will be more expensive to do so – in the recession of the early 90’s Britain cut infrastructure spending in order to deal with its budget deficit and ended up paying the price in later years. Since 2008 government investment in this area has fallen significantly. Even the Economist, hardly a bastion of Keynsian ideals, had proposed a £28 billion increase – the proposals in budget are a fraction of that.
Britain’s housing market has been a drag on consumer confidence. There has not been enough support for first-time buyers; without enough people entering the market the wheels of the system have ground to a halt. Both George Osborne and Alistair Darling had tried to no avail to increase the number of houses being built, but a rise in size of guarantees for lenders to homebuyers to £130bn is an attempt to stimulate this. Mortgage lenders have also been criticised for being too strict, so the government’s 20% interest-free loans to people buying new homes are a push for them to lend.
In the Chancellor’s original deficit reduction plan, the idea was for monetary policy to intervene if the economy began to suffer. By changing the Bank of England’s remit to focus slightly more on growth, it will encourage it to be more proactive without risking credibility, spooking markets, or increasing long-term inflationary expectations.
Then there are the growth figures. The most repeated so far is that this year the economy will grow by 0.6% – half the amount forecast three months ago – but will manage to avoid a triple-dip recession. Debt as a share of GDP will increase to 85.6% in 2016-17 (though even that relies on the OBR’s forecasted growth figures, themselves consistently downgraded) and the Chancellor is on course to miss his target of eliminating the structural deficit by 2015. These are more interesting in a political sense than an economic one. Not many who would have predicted the eurozone crisis would take the turn it did nor have many undertaken research into the effect the downfall of a financial system as large as Britain’s could have on an economy.
The Labour Party are wrong when they say the stagnation in growth is George Osborne’s fault. However, Robert Skidelsky, Keynes’ biographer, offered a more nuanced critique of the Chancellor’s game plan, suggesting that while his policies have not caused the slump, they have prevented the economy from recovering. Despite the analysis directed towards it, this budget is broadly neutral, it will not alter the Chancellor’s course, and one senses that this was planned more with politics in mind than economics. George Osborne seems like a canny politician (last year’s furore over pasties notwithstanding) but at the moment Britain needs a brave economist. One of those could well be arriving from Canada in June.