Has the Chancellor given up on the idea of a Budget for Growth?
20 March 2012
Will George Osborne deliver another Budget for Growth tomorrow? If the usual trail of pre-Budget trails and leaks is anything to go by, those looking to government to take a lead on growth are likely to be disappointed. Of course, Osborne may have kept a suite of blockbuster growth policies up his sleeve for tomorrow to blow away such doubts, but the early signs don’t look good.
The build up to last year’s Budget was all about growth. Following the brutal Spending Review of October 2010, George Osborne was desperate to prove that his government was about more than just austerity. The Budget was packed full of high-profile growth schemes – Enterprise Zones, further cuts to corporation tax – and was accompanied by a hefty document called the “Plan for Growth”.
However, the plan hasn’t exactly worked so far. The economy has barely grown since the Budget, and unemployment has increased by a further 200,000. The government’s “growth review” process seems to have gone quiet, while many of the government’s flagship policies have fallen flat (partly because some of them weren’t very good policies in the first place). It’s a shame – the Plan for Growth was a decent document, and there were many good ideas that could have been built upon. The government is not short of ideas on growth, it is short on commitment.
A year on, with the economic outlook decidedly worse than it was in March 2011, it would be reasonable to expect the Chancellor to have another go at delivering a Budget for Growth. Yet the pre-Budget debate suggests otherwise.
So far, coverage has been dominated by the debate over the 50p tax rate, and the associated concessions to the Lib Dems – the Tycoon Tax, the Mansion Tax, plus the faster increase in the personal allowance. But any combination of these measures is likely to be fiscally neutral, and it seems very unlikely that those on incomes of over £150,000 will immediately start working (and spending) much harder following a tax break. There may or may not be a benefit to the Treasury’s tax take, but it’s hardly likely to persuade UK businesses to invest en masse and trigger a solid recovery.
The other measures discussed have equally little to do with short-term economic growth. We’ve had localised public sector pay (a long-term measure, as Henry Overman explains), road privatisation (nothing due to be announced until the Autumn Statement) and a few other minor announcements. Credit easing, this morning’s £20 billion policy trail, may make some difference to credit-starved SMEs, but then again it may not – after all, the Treasury’s previous £40 billion Enterprise Finance Guarantee scheme had very little impact.
There is nothing wrong with these measures per se, but what is striking is how little they have to do with short-term economic growth. The Chancellor knows that growth and jobs are top of most people’s agendas, and yet there are precious few signs that we can expect a Budget for Growth tomorrow (unless Osborne is keeping a series of blockbuster growth policies up his sleeve). Whether this is because the Chancellor has given up on the idea of coordinating a growth plan from the Treasury, or because he thinks the economy will bounce back more strongly without his intervention, it is a pretty stark change from last year’s Budget for Growth.
But surely it is very difficult for the Chancellor to do much about growth while his budget is so constrained? With inflation still above target (although receding, according to today’s stats), and the OBR suggesting the UK has very little spare capacity to grow, surely the Chancellor has no option but to forget this year and focus on long-term growth. The logic seems appealing, but it is wrong. There is an awful lot the Chancellor can do, even while keeping the deficit on track.
Over the past few months, there has been a growing body of sensible, serious economic proposals that would stimulate short-term growth without sacrificing the UK’s cherished fiscal credibility. Simon Wren-Lewis, an Oxford University macroeconomist, yesterday captured the thrust of these proposals perfectly. He argues for an immediate, investment-led stimulus (re-instating scrapped infrastructure projects, house building, National Insurance cuts for the young, a review of tax credits), to be compensated by bringing forward future tax rises, spending cuts, and authorising the Bank of England to use more QE to control government borrowing costs. The net effect of these policies, if properly balanced, would be to promote growth now without raising the deficit or affecting UK government borrowing costs.
There are two strands of thinking within this argument. The first is the “balanced budget multiplier”, the idea that even a fiscally neutral stimulus can boost the economy without raising the deficit, as long as it increases the efficiency of government spending. Wren-Lewis is a big advocate of this argument (first developed in the 1890s), and a recent paper by the Social Market Foundation applied the concept to this year’s Budget.
The second big idea is that the UK could inflate away some of its debt burden with a temporary bout of controlled inflation. A recent paper from CentreForum showed that, during the 1930s, Britain’s recovery from the Great Depression was triggered by a signal from government that prices would rise. This effect stimulated nominal GDP growth, and began to reduce the UK’s debt burden. The same effect could be achieved today, CentreForum argues, by temporarily raising the inflation target for three years (although getting inflation back down afterwards would be challenging!).
Both of these policy levers can be used to deliver long-term benefits to the UK economy. Investing in the right areas now, while reducing less productive government spending, should help to raise productivity. If we can focus more of this spending into innovation-friendly schemes (as we argued), it should be possible to raise long-term productivity. At the same time, further monetary easing could be used to improve the flow of credit to innovative SMEs, as the Big Innovation Centre argued last year. These short-term growth boosters can also act as a platform for long-term prosperity.
These proposals may be bold, but they are generally sensible – they all offer the prospect of higher growth without higher government borrowing. They also firmly dispel the myth that there is nothing the Chancellor can do to promote growth; there can be no excuses for failing to deliver a Budget for Growth tomorrow.