So finally we have all the details of the Budget that hadn’t already been leaked.
The big headline-grabbing measures were the cut in the top rate of tax and the increase in the tax-free allowance to £9,205. The corporation tax rate will fall to 24% next month, with 22% the target by 2014. At the same time tax relief for top earners was reduced. The government has closed a major stamp duty loophole and increased the top rate to 7%.
However, despite all the publicity, the impact on the deficit (our annual overspend) – or growth, for that matter – will be relatively small. This is because the chancellor has balanced any tax cuts with tax rises and cuts to child benefit (although these were smaller than expected). Market reaction has been muted with both gilts and CDS spreads virtually unchanged.
The loan guarantees might help increase bank lending to business, which in turn would boost broad money. However, past evidence suggests that such schemes have only a small impact. This is because only projects that aren’t good enough to get loans at market rates will benefit.
And because the net effect of the Budget is so small, the biggest story is that the official projections for growth probably remain too optimistic. The Office for Budget Responsibility now thinks that GDP will grow by 0.8% (up from 0.5%) in real terms this year.
However, other experts are much more bearish. Capital Economics thinks it will shrink by 0.5%. And this extends into the future. While the OBR predicts growth of 2% (down from 2.1%) in 2013 and 2.7% in 2014, Capital’s estimates are 0.5% and 1.5% respectively. This means that net public debt will be higher than the 76.3% expected by 2014-15. Overall, they think that “the Government will soon start finding it rather harder to bring down borrowing”.
Overall, today simply confirms that the government is relying on economic recovery to come through stronger monetary growth, not a fiscal stimulus. Given that interest rates and asset purchases are the Bank of England’s area, the Budget will have little impact there.