Chancellor Osborne’s second Budget was, by just about all measures, somewhat less exciting than his first one. Having already set the envelop for fiscal tightening over the life of this Parliament back in June, and followed that up with the Comprehensive Spending Review in the autumn, George had very little room for manoeuvre. The result was a Budget that was almost reminiscent of Gordon Brown – little big-picture news, but lots of fiddling with small policies to grab attention.
The cut in fuel duty duly obliged on this score, pitched as support for hard-working families and hauliers. Osborne paid for this – and indeed most of his other small give-aways – mainly by hitting North Sea companies, who will see their tax bills soar. There was also the usual ‘closing loopholes’ claim – this is even more popular with residents of No. 11 Downing Street than ‘efficiency savings’ – which is forecast to raise Â£1bn.
In truth, the Chancellor had cash left over after clobbering Shell and BP, which he threw at private sector businesses. This was supposed to be, after all, a ‘Budget for growth’, and the Government is all too aware that, as it shrinks the public sector, growth will have to come from private companies. So Osborne introduced a number of policies aimed at supporting business. These included cutting corporation tax by an extra penny, going back to the 1980s with the re-launch of enterprise zones (which weren’t incredibly effective the first time around), and upping the thresholds and allowances on the Enterprise Investment Scheme and Venture Capital Trusts, which give investors tax incentives to back small businesses.
The idea behind these policies – and the others that were announced – is to create the right conditions for business to flourish in the UK, driving the economy forward. Unfortunately, none of the policies that were announced are likely to boost growth in the near-term, which still looks decidedly shaky. But Osborne and co are hoping that, over the medium term, the tax changes will encourage international businesses to locate (or stay) in Britain, while also providing much-needed support to the UK’s thousands of small- and medium-sized enterprises (SMEs).
So here’s the big question: will the policies have an impact on growth? Given the political divide and rhetoric at the moment, this is clearly not a question you can ask an MP – or, at least, not one you can expect to get a reasoned, balanced answer to. Happily, there is a very well-qualified and independent institution that you can ask – the Office for Budget Responsibility (OBR).
Regular readers will know I was sceptical about the OBR when it was first set up, but it won me round last autumn, and still appears to be going from strength to strength. The OBR’s job is to provide an independent assessment of the state of the public finances, and Wednesday’s Budget document was accompanied by the Office’s latest report. Given that the Budget was fiscally neutral – the give-aways really did match the takeaways – the main news in the OBR’s forecasts came from the weakness in the UK economy at the end of last year, when the snow disrupted activity. And given that the OBR thinks this weakness is cyclical (temporary-ish), rather than structural (permanent-ish), the extra government borrowing that it expects to ensue does not affect Osborne’s ability to meet his fiscal targets.
But there was another, quite revealing assertion in the OBR’s report. One critical element of its forecasts is the underlying assumption about trend growth – how fast the economy can grow without stoking inflationary pressures. And, despite Osborne’s raft of pro-business measures, the OBR’s view on this has not budged at all. Or, in other words, its best estimate is that the Budget policies will have no impact on growth over the medium to longer term. In part, this probably reflects the well-known problem that it is very rare for microeconomic policies to ever show up in macroeconomic data. But it is also the real give-away in this Budget – for all of the Government’s bluster and noise, it has not come up with anything that will fundamentally change the prospects for the UK economy.