George Osborne’s second Budget was never likely to match the fiscal pyrotechnics of his first one. The chancellor had written much of the script last year in June’s emergency Budget and October’s comprehensive spending review. There was little room for a shift in economic policy.
This Budget was anyway intended to serve a political purpose; to shift the focus away from current austerity to future prosperity. And while it did not live up to its grand billing of being a “Budget for growth”, it was broadly pro-business.
Mr Osborne continues to be criticised for the ambitious pace of his deficit reduction programme – especially in view of recent evidence that economic growth is flagging. But his audacious gamble – that reining in the state’s finances will bring the confidence needed for businesses to invest and expand – remains justified.
The alternative – to slow down deficit reduction and trust twitchy bond markets to stay calm – looks no more appealing than it did last year. It is at least as risky a gamble and one whose consequences would be even harder to deal with were it to go wrong. The austerity plan has convinced markets that it is safe to lend to the British government. As Mr Osborne pointed out, some countries with lower deficits have far higher borrowing costs than the UK.
This newspaper has criticised Mr Osborne for not coming forward with a contingency plan were growth to slide further. While he did not do so in his speech, he did show a degree of flexibility. The path of deficit reduction will be slightly less steep, partly because of higher inflation and partly because of the dismal winter, that has left the economy at a lower level than anticipated last summer.
Mr Osborne’s plan depends on more than sticking to spending targets, important as this is. It also requires the private sector to take up the slack as the state retreats. Private businesses are not short of cash. Much of Mr Osborne’s speech was devoted to measures that might encourage them to invest it.
In the longer run, the real challenge is to lift the UK’s rate of productivity growth, and it is questionable whether a Budget is really a suitable vehicle for achieving this. True, tax measures can help. But the need to cut the deficit means that Mr Osborne has little scope to cut taxes.
He used what room he has to help businesses a little, cutting corporation tax faster than he had previously promised. On personal taxation he redeemed the coalition’s commitment to take more people out of income tax. Otherwise, Mr Osborne offered some warm words about the need to cut the 50p top tax rate at some point. However, he made no firm commitment.
There was no overall tax giveaway. By shifting the indexation of tax thresholds from the retail prices index to the slower-rising consumer prices index, Mr Osborne took back what he gave. More important than the overall tax burden, which cannot change much, is Mr Osborne’s commitment to a simpler and more predictable tax system. This will hopefully not be limited to some forgettable political rhetoric on Budget day.
On the spending side, Mr Osborne announced a welter of initiatives of the sort for which Gordon Brown was notorious. Many were marginal and will probably do little harm.
But some smacked of misplaced priorities, such as the plan to provide £200m to make low-interest loans to first-time housebuyers. It is true that there is a shortage of affordable housing, and banks have wisely tightened their lending criteria. But the answer cannot be to encourage people to take on loans they cannot afford. It is more sensible surely to increase the supply of housing, not least through a more rational planning system.
The government does seem to grasp this. It is showing signs of being willing to challenge Britain’s endemic bias against development. The chancellor proposed 21 enterprise zones where, in return for councils relaxing some planning controls, the government will give business tax benefits to draw in activity while letting local authorities keep more of the returns. This newspaper is not enthusiastic about enterprise zones, which generally just displace activity from other areas. But if Mr Osborne’s initiative demonstrates the positive effects of development and clears the ground for wider planning reform, it could be a worthwhile experiment.
Some of the biggest measures related to the energy sector. The most important of these was the decision to impose a floor price for carbon. Britain urgently needs to renew its stock of elderly power stations. This change could create the environment in which this investment can be pushed forward.
Shorter-term political calculations obliged Mr Osborne to reverse the anticipated rise in fuel duty. This was designed to head off rising public anger about high fuel prices, but Mr Osborne attempted to clothe it in fiscal respectability by marrying it to an increase in taxation on UK oil and gas production. In future the two will sit on a sort of see-saw with one or the other kicking in as energy prices rise and fall. Like the Budget as a whole, the politics of this is perhaps more important than the economics.
Mr Osborne’s last Budget helped to calm the financial markets. The latest one should give a measure of reassurance to companies. Although the recovery remains uncertain, the private sector may become a bit more willing to pull its weight.
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