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The Budget 2013
A budget that pressed a lot of buttons - will it work? Analysis by David Smith, Economics Editor, The Sunday Times
After four budgets in three years, George Osborne is getting used to the routine. He is also getting used to things not turning out quite as he hoped. The question is whether the chancellor is making life better for business, and for households, in a way that gives hope that the economic clouds that have dogged his time in office will lift.
So how did he do? As he has discovered before, budgets do not always stand the test of time: last year's unravelled remarkably quickly. This time, however, Osborne can at least take comfort from the early reviews. Most business bodies were positive about his budget, some almost effusive. To achieve good reviews against the backdrop of a subdued economic outlook showed a certain amount of political skill.
This was one of the themes I picked up in my REED Budget Breakfast presentation in London on the morning after the budget. The economic backdrop continues to be difficult, with the Office for Budget Responsibility forced to halve a growth forecast it made only three months ago. So, instead of the 1.2% growth the OBR, the official forecaster, predicted in December (which itself was very modest), growth is now expected to be only 0.6%. Weaker consumer spending, business investment and exports all contribute to the downgrade.
After just 0.2% growth in 2012, it starts to look a bit like stagnation, though the official forecaster remains optimistic on jobs. It predicts a rise in employment of a million between 2012 and 2017, driven by the private sector. This looks ambitious, but it came on the back of official figures showing a rise of 590,000 in employment over the past year.
This was where the most interesting individual measure of the budget came in: the new £2,000 a year employment allowance, aimed at small firms and charities, comes in. The measure, essentially a recycling of the National Insurance gain the government will get from higher contributions from some groups of workers, is not as big as it may have sounded – its eventual full-year cost of £1.7 billion is relatively modest. But it will make a difference at the margin, particularly for organisations pondering whether to take on an additional employee.
Every budget purports to be a budget for business, or enterprise, or growth. This one had a better claim than most. Osborne pressed a lot of buttons. Not all of them will work, but some just might.
So corporation tax is to be cut to 20% in 2015, which will be good for inward investment, as well as for corporate Britain more generally. An industrial strategy for 11 sectors of the economy, most notably aerospace, is taking shape. R & D tax credits are improved, and growing firms wanting to raise money on AIM, the Alternative Investment Market, will be helped by the abolition of stamp duty on it and other junior market shares.
Growth should also get a lift from additional infrastructure spending and, more interestingly, from a new system of mortgage guarantees under the Help to Buy label, with the aim of both boosting new house-building and kick-starting the market for existing homes. Transactions are only roughly half their level of six years ago, hit hard by the continuing mortgage famine. This might make a difference.
Osborne did not, either, ignore the important business of ensuring there was something there for ordinary voters. The coalition's big achievement has been raising the personal income tax allowance. The aim was to get it to £10,000 and the chancellor was able to announce that this will be achieved in April next year. "No tax on the first £10,000 of income" is not a bad slogan. Taken together with a 1p cut in beer duty and another freezing of petrol duty, these were populist measures that might just turn out to be popular.
So there was plenty to chew on. Some will dismiss the budget as tinkering, though Osborne would prefer to be seen as a chancellor leaving no stone unturned in his search for growth. That, of course, was the title of Lord Heseltine's growth agenda report, most of the recommendations of which the government is adopting. So was it a budget for growth? Within the constraints, yes it was.
The trouble is, those constraints remain real. The scene was set for this budget when in February Moody's, the ratings agency, announced that Britain's AAA rating was being downgraded a notch. The reality of the public finances is that the deficit has stopped coming down. In underlying terms, borrowing was £121 billion in 2011-12, and will be £120.9 billion in 2012-13 and £120 billion in 2013-14. And remember that this is based on forecasts that hitherto have been optimistic.
So Britain's fiscal crisis has not gone away – debt will not start falling as a percentage of national income until nearly the end of the decade – and neither have the economic uncertainties.
The budget contained much that was useful. But if events in Cyprus signalling a worsening of the Eurozone crisis, or if other factors act to reduce growth and push up borrowing, the risk is that these useful measures will be swamped by the bigger picture. We have to hope this is not the case. This budget probably deserves better than that.