The Budget – a glass half empty or half full?

This week’s emergency budget delivered by George Osborne was both significant and clever.  Significant for the dramatically new direction it has set out for the future of the UK and clever for the way in which funds were found to finance specific new activities.

Depending on the viewpoint you have, you will see the measures announced in quite different ways. 

For the markets – in capital, currency and credit – it has been seen as something of a gamble.  While they liked the clarity of a plan, there are some comments that he may have overdone the size of the deficit reduction.  The facts that the budget will actually lead to lower growth than previously forecast for 2010 with higher unemployment, a higher short term fiscal deficit and will result in a net deficit of well below 3% (the forecast is 1.7%) of GDP in 2015 provide evidence for the size of his additional discretionary fiscal tightening.

If you work in the public sector, the glass contains something of a spiked cocktail or at best some nasty tasting medicine. 

Over the last three years, public spending has been a major cushion to stimulate growth.  But in the short term, the forecasts for the rest of the year bring all the main contributors to growth (private consumption, business investment, net exports and public sector spending) down to fractions of a percentage.  In fact, the expected 1.2% expansion on which the budget was based for this year is largely dependent on a positive increase in inventories by companies over the next 9 months.  It will not take much for any of those small growth figures to turn negative.  And in the presence of major cuts in public spending, this is why the risk of a return to recession this year is increased. 

The government are hoping that the next few years will see the private sector of business emerge out of hibernation now that the stage is set with less government, a plan for stability and encouragement for enterprise.   In fact, looking through the small print of the report the encouragement for business is not small.  In addition to the reductions in corporation tax and measures on NI, there are also a variety of schemes to incentivise innovation and regional growth as well as a study into whether the banking sector is providing the right kind of finance for business.

In juggling the government’s finances the Chancellor has gained in stature this week.  He found large sums from cuts in welfare and projected cuts in other areas of the public sector to fund essentially some tax reductions at the lower end of the income scale and for enterprise.  His vision for the future is for an economy much more focused on the private sector with the potential for large parts of the public sector delivered by private companies but financed by the state – presumably at greater levels of efficiency than currently in order to achieve his targeted cuts.

It is a vision which has its merits and also its disadvantages.  Regardless of that debate, the real issue facing us is about the rate of the transition.   Is it simply too quick?  Is the removal of government as a borrower from financial markets plus the incentives provided by the budget enough to stimulate private business?  The risk that the answer to that question is no is very high.  I expect we will grow very slowly this year: not a double dip but not a dynamic bounce back for most people in society.  The budget has actually delayed the recovery by a year.  A year in which many will feel great hardship.  The success of the budget will be in whether that short-term pain is out-weighed by a more robust and healthier recovery thereafter.