Theoretically this budget counts as broadly “neutral” since the main austerity measures were pre-announced last year. But in practice the fiscal stance is anything but. In 2011-12, current receipts are due to rise by one percent of GDP, reflecting principally increases in VAT and National Insurance Contributions, while spending cuts of a similar size are in the pipeline. In this context, these latest measures cancel each other out. The fuel duty reduction this year is worth almost £2bn but the chancellor is recouping this from North Sea producers.
Thus boxed in, this “budget for growth” has had to rely on relatively low cost efficiency measures aimed at improving the working of the economy, ranging from resuscitating enterprise zones, through de-regulation, to training and apprenticeships to combat youth unemployment.While welcome, supply-side improvements are no quick fix and take time and persistence to come to fruition.
The focus of deficit reduction is on spending cuts and tax rises, but it is also crucially dependent on a return to robust GDP growth. The fall in fourth quarter output has had a knock-on effect on the economic forecast for this year and next, but growth is projected to get back on track further out. To date, though, there is little evidence of the promised rebalancing of the economy. Consumer spending is certainly taking a back seat – this year’s forecast increase has been halved - but exports and business investment have yet to take off.
Slower growth and higher inflation - which is pushing up government spending faster than receipts – have already resulted in some slippage in the deficit reduction programme before it has really begun, but the OBR still thinks the government is on track to eliminate the structural deficit by 2015-16.
As far as policy is concerned we are in uncharted waters with interest rates around zero. Perhaps the greatest risk is that the Chancellor’s strategy relies on monetary policy remaining loose to offset the tight fiscal stance - but this is outside his control and the MPC is becoming increasingly concerned about above target inflation.
