What we saw last Wednesday was, by a considerable margin, George Osborne’s most impressive budget. The Chancellor’s Commons set piece, in terms of both content and delivery, was substantive, sure-footed and – here’s the clincher – actually stood for something.
The package of measures in Osborne’s fifth annual red-box wielding ritual were clearly designed to promote business investment, boost foreign trade and unlock pension savings. For once, no post-budget spin was required. The Chancellor has expressed some strong opinions and developed some policies you can hang your hat on. Good – and it’s certainly been a long time coming.
While the microeconomics of Budget 2014 (the individual measures) contain much that is laudable, the bigger macroeconomic picture remains dire. I’m glad Osborne has put his thinking cap on and finally decided to do something. But I remain extremely concerned about the UK’s broader budgetary stance, our massive (and still fast-expanding) national debt and the lack of determination when it comes to rescuing Britain’s public finances from their current parlous state.
The backdrop to this budget was, of course, a strong uptick in growth. This time last year, the UK economy was estimated to expand by just 1.8pc in 2014. Signs of recovery, though, saw this projection upgraded to 2.4pc in December, then 2.7pc last week. This overall forecasted improvement of 0.9 percentage points was the biggest upward growth revision between budgets for 30 years.
Osborne knows, though, that the change in the UK’s fortunes is, indeed, just an “uptick”. This recovery is “not yet secure”, he warned last month in Hong Kong, adding that UK growth is “neither balanced nor sustainable”. In a bid to build an economic upswing on more than consumption and credit, then, the Chancellor set out to encourage business investment. The UK’s rate of corporation tax – which falls to 21pc next month and 20pc in 2015 – is among the lowest in the Western world. Yet tax-breaks offered on capital good purchases are meager. This is one reason Britain’s business investment has yet to recover from the 2008 sub-prime collapse and remains stuck at around 12pc of GDP, compared to 18-20pc in France, Germany and the US.
At the heart of this budget, then, was a doubling of the annual 100pc tax allowance for business investment to £500,000. Back in 2012, the Chancellor raised the allowance ten-fold, to £250,000. With this rise due to expire next month, business leaders had been lobbying hard for an extension – which they got, until 2014/15, at a cost to the Exchequer of £2bn. The Treasury hopes additional capital spending provoked by bigger tax breaks will promote growth, generating more revenue in turn. The Chancellor also revealed that business rates discounts and enhanced capital allowances for enterprise zones will continue for another three years.
New equipment and machinery pushes up the ratable value of business premises, of course. The UK’s hard-pressed manufacturers, in particular, are right to keep pushing for a revamp of the business rates system, which clearly deters investment. Overall, though, Osborne’s more generous investment tax breaks are bold and deserve to succeed.
The Chancellor also took steps to promote exports – another sector that has badly under-performed in recent years and which is crucial if this UK growth spurt is to become a sustained recovery. Although sterling has fallen by around a fifth since the 2008 crisis, we’ve still run a series of record external deficits, with the latest figures showing exports plunging 4pc during the year to January 2014.
On cue, Osborne yesterday pledge to overhaul UK Export Finance’s (UKEF’s) direct lending programme, doubling it to £3bn and cutting related borrowing costs by a third. British firms have long-complained their European competitors enjoy more favorable export finance facilities. Certainly, French and German state export agencies supported overseas sales worth £35bn and £8bn respectively last year, while the UKEF total was little more than £4bn.
We must hope that this shake-up of British export finance extends trading opportunities to a broad range of firms, so helping our external sector to contribute to economic growth, rather than acting as a drag on recovery. That certainly seems to be the Chancellor’s intention. It’s odd, then, that the budget fine print shows an astonishing paucity of ambition when it comes to the UK’s once-legendary exporting prowess.
Net trade will continue to subtract 0.2 percentage points from growth this year, according to the technical documents, before adding just 0.1ppts in 2015. The following year, and in 2017, our external sector will add a whopping 0.0ppts to the UK’s growth effort. And by 2018, the impact of net trade will once again be negative.
Pulling out to the bigger picture, my praise for this budget turns to concern, and even scorn. I suppose Osborne deserves some credit for delivering a fiscally neutral package, despite the better growth numbers. The Chancellor’s measures amounted to a tiny £0.5bn giveaway in 2014/15, and a small fiscal squeeze over the next 5 years as a whole.
I very much doubt such admirable parsimony will extend to next year’s budget, which will be just weeks before the May 2015 election. That’s likely to be an old-fashioned giveaway, which will no doubt plunge our national accounts even further into the red. All of which serves to increase the concerns raised by this latest crop of fiscal forecasts.
Higher growth is supposed to lower government spending while boosting revenue. Why then, is the figure for 2014 public sector net debt – broadly, the amount we must borrow – identical to that published in the 2013 budget? Back in March 2013, when the UK was forecast to grow by just 1.8pc, we were due to borrow a massive £108bn in this fiscal year. Last week, even though growth of 2.7pc now looks likely, we’re still set to borrow £108bn. How can that be? Are the forecasts nonsense – totally unaffected by growth? Or has the Chancellor used some economic sleight of hand to “spend the proceeds of growth”, rather than using them to borrow less?
Back in 2009-10, our annual deficit was a monstrous £157bn. It’s worth remembering, though, that £108bn is still 6.6pc of GDP – so our deficit remains bigger than when a bankrupt UK went “cap-in-hand” to the IMF in 1976. Just days after the budget, new data showed borrowing in February of £9.3bn, up from £9.2bn in February 2013 – again, despite much better growth this year. And, for all the talk of “austerity”, consider that the UK’s overall national debt – on which we must constantly pay interest, using money that could otherwise be spent on public services – just hit £1,250bn, up from around £750bn back in 2010, when so-called “austerity” began.
Yes, the UK is due to run a budget surplus by 2018/19, according to this latest budget, but an annual surplus doesn’t mean your budgetary problems are over. It simply means the stock of national debt has peaked – unless, of course, you return to deficit the following year, in which case the debt stock climbs even higher.
So, I congratulate the Chancellor on his best budget to date. Some of the measures are coherent and helpful. But the big fiscal picture remains horrendous. This was a mid-term budget, set against a strongly improved growth backdrop – and, still, there were no meaningful steps to actually reduce the UK’s national debt. That says to me that, while he talks the “austerity” talk, this Chancellor isn’t serious at all about getting us back on the fiscal straight and narrow.