This is a Budget for enduring growth and jobs in the future proclaimed the Chancellor. Delivering his second Budget, Osborne announced Britain was moving to reform and recovery as he set out pro growth measures including a further 1% cut in corporation tax, plans to merge income tax and national insurance, a bonfire on tax reliefs and business regulations. This was also a Budget to protect the squeezed middle, and Osborne went further than many expected by cutting fuel duty by 1p a litre from 6pm this evening and introducing a Fair Fuel Stabiliser.
The funding for these commitments will be provided in part by an extra levy on North Sea Oil and gas production. Budgets are one of the few times when the Government holds all the cards, when the Chancellor can announce a slew of tax and spending changes to boost the economy and wrong foot opponents. This approach was de rigueur for much of the New Labour years as Brown, in typical machine gun delivery style, would let forth an avalanche of announcements.
That was then and this is now. Hemmed in by his prescriptive fiscal plan, a torpid economy and high inflation, the Chancellor had far less room for manoeuvre today. With this in mind we could understand Osborne delivering a low key Budget – indeed that was what many of his backbenchers wanted. Unfortunately, the Prime Minister upped the ante by describing the Budget as the most pro growth in a generation – judged against that inflated billing, the statement cannot help but look slightly underwhelming.
The economic imperative of this Budget is to stimulate enough private sector enterprise to give the economy the momentum to begin to grow without the help of the fiscal and monetary stimuli. In short, to get the bike to ride without the stabilisers. To that end the Chancellor announced a package including: a surprise extra 1% cut in corporation tax from April this year, the creation of 21 new enterprise zones, scrapping £350m of business regulation and new work experience placements and apprenticeships. The Treasury have been spinning that these amount to a ‘Lawsonian‘ package of reforms capable of revivifying our stagnant economic productivity. These are all commendable measures – our Byzantine tax system needs to be simplified and few would dispute the merit in creating apprenticeships and work experience placements. These are all necessary micro economic measures but they are not sufficient by themselves. These reforms will take a long time to impact upon our sclerotic economy. More fundamentally, they need to be complemented with macro economic reforms. As Labour has been fond of saying, the best thing the Chancellor could do is to ease his foot off the cuts pedal. In this school of thought it is the macro economic mast to which this Government is so tightly bound that is the real enemy of enterprise.
As much as this is a financial statement it is also a political device by one of the most astute politicians of his age. Osborne tried to cast this Budget as an attempt to show that we are all in this together – a remark which provoked derisive laughter form Labour MPs. That is why all but the wealthiest benefit from an increase in personal allowance and there is a symbolic whack on the ―non-doms and their private jets. The cut in fuel duty, Fair Fuel Stabliser, increase in personal allowance and help for first time buyers are sweeteners to ‗alarm clock Britain. ‘By and large this group accepts the argument for taking radical action to reduce the deficit. They also, by and large, think the previous administration is to blame for this mess. But this political capital could quickly evaporate when their own wallets take the whack – this Budget is a clear gesture from Osborne that the Government feels their pain.
There are important pro-growth measures in this Budget, but whether they will put Britain on the path to recovery remains to be seen. The most significant determinant of whether the Government delivers on this objective is not this Budget but last year‘s autumn‘s Spending Review. Seen in the shadow of that momentous announcement, today‘s events are the next step of a huge gamble for the Government. How to reduce the Budget deficit is the defining question of our political age. Osborne’s answer to this question has been so unequivocal, and his strategy so rigid, that if he is wrong this could be a one term Government. Alternatively, if his path is to recovery, the Tories will, barring major unknowns such as a war, win an overall majority in 2015.
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