The UK Budget and the Economy

The key to understanding the impact of today’s budget on the real economy is found in the Chancellor’s comment right at its beginning that it would be a ‘fiscally neutral’ budget.  In short, that means that whatever measures he introduced to, say, cut taxes or duties would be exactly offset by others that increased revenues or reduced spending.  On balance, no net direct impact on total demand over the planning horizon of five years up to 2017/18, but perfect for the next election.

If you look at the Treasury table that analyses the net affect of all today’s measures http://www.hm-treasury.gov.uk/budget2013_policy_decisions.htm, you will see that in this year there is actually a net withdrawal of money to the tune of £1.3 billion mainly driven by spending cuts.  Even though he has removed the fuel escalator due in September and given something back to beer drinkers, the Budget for this fiscal year will contract the contribution of government spending on the economy.  In 2014/15 as many of the measures announced today come into effect such as the Employment Allowance of £2000 and various measures for home-buyers this becomes a net input to the economy of £1.6 billion.  In the following year, as the new Child Care scheme starts to be phased in, there is a net injection of some £2.8 billion.  In the following two years we return to withdrawals of £1.7 billion and £1.3 billion per annum.

One objective the Chancellor has achieved is

to provide evidence that he will not shrink from his policy of fiscal consolidation as the key to government policy.  That policy commitment will please the rating agencies. 

The fact that many if not most of the measures today will not come into affect for at least another year makes me think their impact on growth and prosperity will be very, very limited for 2013.  Unless we feel motivated and inspired to start a business, buy a house or invest in new equipment by the promise of some help in the future, they will have no effect.  In fact, that promise of a future incentive may cause people to postpone any such decisions until the measures have come into force.

The missed opportunity in all of this for me is the way in which the under-spend by government departments of nearly £12 billion seems to have been used.  Some £3 billion of the amount has been allocated for future infrastructure spend.  The rest has not been clearly allocated within the total Budget calculation.  It seems to me that when a VAT reduction of 1% would cost the Exchequer around £4.5 - £5 billion, there was an opportunity to make a temporary VAT reduction within the year to act as an incentive for growth: even a reduction by as much as 2.5% back to 17.5% could have been achieved and would have been a better use of that cash saving.  It could have been positioned not as a policy U turn but simply as a way of making sure that planned spending was still going to hit the economy within the current year.

As it stands, the cynic in me wonders whether this Budget was one whose timing gave more attention to the political needs of the next Election in 2015 than to the short and long term needs of a struggling economic system.