Spectator Events in association with Aberdeen Asset Management presents:
Budget 2013: whatever happened to the recovery? wednesday 20 march 2013 the Savoy
George Osborne does not have much faith in Budgets as a tool to speed economic recovery. He reminded us of this today. Normally, we at The Spectator are trawling desperately through the small print and feel horribly short of time to meet our 2pm deadline. This week, we were twiddling our thumbs. There was the usual whale spray of policies, 1p off beer duty to please Tories and a nudging up of tax thresholds to please the Liberal Democrats. But this was, as we suspected, an empty budget. The Office for Budget Responsibility itself judged that its impact on Britain’s economic growth by 2015 will be, broadly speaking, zero.
Budget 2013: the main points 1. Mini tax cuts for companies and (some) workers. The succession of corporation tax cuts is to be extended, to 20 per cent in 2015-16. There are other schemes, too: small companies will be offered national insurance holidays for up to four minimum wage workers they employ. Welcome, but you need to quantify this: it makes workers 4 per cent a year cheaper to employ. It’ll help, but is unlikely to dent our youth unemployment figures. The proposed 3p in fuel duty has been suspended, as expected. 2. The outlook’s absolutely vile. The most important part of the Budget was perhaps the economic forecasts. Growth has been slashed again, as has become traditional in British budgets. Forecasts for normal salaries have been cut too. It will take about 11 years for earnings to get back to where they were pre-crash. And that’s if you exclude housing costs. We put the numbers in for RPI inflation, and it suggests earning power won’t be back to where it was until 2100. 3. Sub-prime mortgages: what could possibly go wrong? There are interest-free loans for homebuyers up to 20 per cent of value of new-build properties. And bank guarantees to underpin £130 billion of new mortgage lending, for three years, from 2014. Cunningly, this will not show up on the national accounts. 4. Monetary activism. The Bank of England will be given a remit to look at growth, not just inflation. This is what Sir Mervyn King has been doing anyway. Osborne is much looking forward to the arrival of Mark Carney, the Canadian who is set to become Bank of England Governor.
What has the Budget done for growth? Growth downgraded again When Osborne delivered his first Budget, the Office for Budget Responsibility expected the economy to grow by 2.9 per cent this year. Now it says it’ll be just 0.6 per cent. And this Budget won’t help: the OBR says it’ll have no net effect on growth.
A lost decade GDP has been stagnant for the past year, but it is expected to start growing again now. But when you account for the rising population, we won’t be back to 2008 levels of prosperity until 2018.
Worst recovery in history On the OBR’s new forecasts, it’ll take seven years for GDP to recover from the recession. Even after the Great Depression hit in 1930, it ‘only’ took four years. The slump we’re in now is the most persistent for the last hundred years at least.
The public finances The deficit: standing still The Chancellor boasts about cutting the deficit by a third in the past two years. But in the next two, he won’t cut it at all. He once said Darling’s plan to halve the deficit in four years was too slow. Now he won’t even manage it in six.
Biggest deficit in the West And that means we’ll go into the next election with a deficit of 6.4 per cent of GDP. That’ll be the biggest in the Western world: double that of the Untied States and bigger even than Ireland, Spain and Greece.
Doubling the debt This government — which so often boasts about ‘dealing with our debts’ and ‘wiping the slate clean’ — has already added £320 billion to the national debt. By March 2018, it’s set to rise to £1.6 trillion — double what it was at the last election.
QE: the silent half of the Budget £375 billion – and more on the way When the Bank of England first started Quantitative Easing back in 2009, economists expected about £80 billion in total. It’s now reached £375 billion, and the current expectation is that it’ll soon rise to £400 billion or more.
Keeping gilt yields low QE has helped to keep the yields on government bonds low — on a tenyear gilt it’s now just 1.9 per cent. In 2010, the OBR expected they would be above 4 per cent by now.
Making Osborne’s debt cheaper Lower gilt yields make borrowing cheaper. In fact, they’re set to save the government about £12 billion on debt interest payments in 2015-16.