Chancellor George Osborne’s Budget promised to reform the economy so that “we have enduring growth and jobs for the future”. There were no significant changes to the deficit-reduction plans the government set out last year. While the Office of Budget Responsibility (OBR) lowered its growth forecast for this year from 2.1% to 1.7%, and for 2012 from 2.6% to 2.5%, it expects stronger growth in subsequent years than it has previously forecast. This will help offset an increase in expected borrowing levels for each year of this parliament, a result of higher spending on inflation-linked benefits. The OBR reckons the government’s fiscal plans are still on track.
The fiscally neutral “pro-growth” Budget contained measures to encourage enterprise. These include a reform of the planning system and more money for apprenticeships. The surprise was the introduction of a “fair fuel stabiliser”, whereby oil company profits are taxed if oil rises above a certain level, funding a reduction in petrol duty. If oil falls, the companies get a refund.
What the commentators said
The Budget was “pretty astute politics”, said David Hughes on Telegraph.co.uk. Osborne’s room for manoeuvre was limited – the big tax and spending decisions had already been set for this parliament. Nonetheless, he used it well. Making oil companies foot the bill for lower petrol duty – most people assumed the Treasury would have to find the money – is “an elegant solution”. Throw in the marginal increase in the levy on banks to fund the micro-measures and it looks as though “oil companies and banks are stumping up… to ease the tax burden on hard-pressed families” and lay the foundation for growth. Osborne’s “headline grabber” looked as though it was inspired by Gordon Brown’s windfall tax, said Nick Robinson on BBC.co.uk.
The Budget reminded me of Brown in another sense too, said Jeremy Warner on Telegraph.co.uk: “A little bit of give here, a lot of takeaway somewhere else.” Higher taxes on banks and oil companies “ultimately find their way into charges for customers”. In the end “we’ll all end up paying”. Still, on the plus side, he has stuck to his plans to fix the public finances, an essential prerequisite to sustainable growth.
The immediate problem is that many of the measures unveiled to bolster growth will only pay off “in 2020, not 2011”, as Julian Astle pointed out in the FT. Governments can do little to boost growth in the short term. Yet Osborne’s fiscal plans “continue to rest on a very healthy acceleration in GDP growth” over the next few years, said Capital Economics.
And that is not a done deal. Prices just keep rising, with the annual rate of consumer price inflation (CPI) at 4.4%, and the retail price inflation at a 20-year high of 5.5%. Core inflation, which strips out food and energy prices, is at 3.4% – the highest since 1997. Inflation is becoming entrenched. Calls for the Bank of England to raise interest rates to pre-empt a wage-price spiral and restore its credibility are mounting.
That could further dent confidence among highly indebted consumers, who account for two-thirds of the economy. They are facing the nastiest squeeze in living standards in decades as the spending cuts accelerate. Throw in last quarter’s slide in GDP, and it seems we are “mired in low-level stagflation… about to be intensified with spending cuts and – quite possibly – higher interest rates as well”, said Larry Elliot in The Guardian. When the coalition took power last year, it bet that private-sector growth would eclipse public-sector shrinkage, said Astle. That bet still stands – and none of the measures in the Budget “guarantee it will be won”.
Budget: key points
• Personal tax allowance to increase a further £630 to £8,015 in April 2012.
• No personal tax increases; consultation on long-term plan to merge income tax and national insurance.
• 10% discount on inheritance tax for those leaving 10% of estate to charity.
• Government-backed shared equity scheme to help 10,000 first-time buyers.
• ‘Non-dom’ levy goes up to £50,000 for those resident in the UK for 12 years.
• Corporation tax to be cut by 2%, not 1%, in April. Bank levy rises to compensate.
• £350m worth of business regulation to be scrapped.
• Fuel duty to be cut by 1p/litre, planned 4p/litre rise (that was due in April) delayed to 2012. Annual fuel duty escalator to be put on hold until 2015.