Budget 2013

Continuity rather than change as the UK economy continues to stroll along sluggishly.
Continuity rather than change as the UK economy continues to stroll along sluggishly

It has been a week since Chancellor of the Exchequer George Osborne announced his 2013 Budget and the reaction has been quite blunt in all honesty. The reaction probably reflects the state of the economy, flat and underwhelming. Osborne has decided to bring in more cuts, looser monetary policy and he is even trying to create another housing bubble.

Before I analyse some of the key facets of the Budget it should be noted that youth unemployment is close to 1m, underemployment (the number highly skilled workers in low paid work) currently stands at 3.05m and the Bank Of England is warning the country of a triple-dip recession. Things look bleak to say the least. With the economy performing so poorly I was hoping (not expecting) the Chancellor to announce at least one policy that could galvanise consumers; a cut in the rate of VAT would have been ideal. Retailers were complaining about a lack of spending on high streets at Christmas, making things cheaper would incentivise spending simply by making things cheaper. This could provide some remedy to the economy that clearly needs a boost.

But it was not to be and Osborne made it clear he was sticking to Plan A, deficit reduction. Unfortunately spending as a percentage of GDP has actually increased since the Coalition took power and this is due to the increase in unemployment and therefore welfare payments. This accounts for the nominal rise in welfare payments such as Job Seekers Allowance, but the decline in real terms. Home Secretary Iain Duncan Smith announcing a 1% increase.

Plan A is not working to the dismay of Osborne and the Office Of Budgetary Responsibility (OBR). The fiscal watchdog, a body founded by Osborne in 2010 had to revise its growth figures again, predicting growth in 2013 to just 0.6%, down from its previous figure of 1.2%. This is not the first time the OBR has had to revise its growth figures, leaving me to wonder how they can be repeatedly making either optimistic or unrealistic forecasts for growth. In their defence there are obviously only predictions and forecasts should never be taken as a given, still, it does not bode well. A figure of 1.2% is hardly triumphant; let alone slashing that figure by half.

As I mentioned the deficit is actually rising, so the austerity medicine is not actually working…yet. It was always a long-term goal, the goal to reduce the bloated public sector and have the private sector replace the jobs lost, but that clearly is not happening. The current deficit stands at £120billion, so the debt-to-GDP is at 88% (IMF). In other words, the public finances are going to have to reduce significantly until we say any major fiscal policies exerted by the government, as the debt-to-GDP is very high.

Clearly Osborne’s policies highlight his and the government’s stance on fiscal policies. But with the economy is such disarray there will be some avenue to try and stimulate the monetary side of the economy and this is the reason why Osborne has refreshed the Bank Of England’s mandate. In an attempt to provide more room to maneuver the Bank of England will now be a little more flexible in it approach. Perhaps the biggest change in the Bank Of England’s mandate is something known as “explicit forward guidance” whereby the MPC makes a pledge to keep rates very low over a designated period. This should give markets more confidence due to the stability announcements should provide. It should also grant consumers with sufficient information about interest rates on loans, if rates remain low it should encourage more spending. These outcomes remain hypothetical and over time, the Chancellor may refresh the remit. In my opinion, the policies may be ineffective. If you look at the current interest rate, it has been at a record low level of 0.5 % since March 2009 and that still has not added much to market confidence. This situation resembles Japan in the early 1990s. Not only can predictions be made about the interest rate, but the evidence given highlights that it does not always translate to increase in spending, despite the low level of interest attached. We could even be in a liquidity trap, a state in an economy where monetary policies have no effect on growth. The interest rate has been 0.5% since March 2009, since then the Bank Of England have tried to boost the economy by buying government debt, quantitative easing, which is monetary policy. Growth has remained very low and the policies do not appear to be working.

The Chancellor also announced a new policy known as the “Help to Buy” policy, which is designed to protect banks against losses on high value mortgages. Politically, it may look good, but economically there are questions. It sounds like a government funded credit bubble. Whilst I do not think it will resemble anything like what we saw during the Blair days of the economy being pumped full of toxic mortgages. As time elapses, the scheme will undoubtedly become clearer. It may even provide the boost this economy so desperately needs.

In all honesty this Budget has confirmed that the UK has a long road ahead in terms of a tangible growth. The economy continues to “grow” at a disappointing rate and there are more cuts to come. Despite the cut in beer relief, the cut in cooperation tax that benefits large multinationals more than small or medium sized ones, this Budget has reflected the mood of the economy. It has been flat.

4 thoughts on “Budget 2013

  1. Plan A may not be producing the growth level we’d all like, but Labour’s Plan B is in disarray, which is quite impressive given it’s hypothetical. Business Secretary Vince Cable said in the Budget debate that he’d found 7 different variants of Plan B, which now only includes reducing the rate of VAT to 17.5% and stalling all government cuts, and “out of this alchemy, somehow reducing borrowing”.
    The UK government may need to construct a drastic overhaul of its tax system or regulation before the economy revitalises.

    1. I agree to an extent, a dramatic slash in VAT to 15% or even 12.5% would make goods and services noticeably cheaper and it would increase disposable income. This would probably be the best way to promote much needed spending. I’ll admit, Labour’s economic plan lack coherence and in all honesty, they do not seem that different to what is already being done. In their defence, once such large cuts have taken place, it is very difficult to come in and undo what has previously been in place, so there is little room to manoeuvre.

      With regards to tax, 100% agree, there should be more tax cuts so disposable income can be reduced, but rising benefit payments, particuarly in the form of JSA is probably preventing this. However, firms could hire more staff if they were making more money. I think everybody would welcome tax cuts or a tax break, but I can’t see this government implementing such a measure.

      1. I’ve always thought, though I haven’t costed the proposal, that employer-side National Insurance contributions should be abolished. This is due to the incidence of this tax, which serves only to suppress wages and depress employment. Since National Insurance is effectively a quite regressive income tax, it would be better to merge it with the current income tax system.
        I think the coalition’s flame of reform is flickering, exhausted by the barrage of abuse they receive, so it is unlikely that our bold proposals would be considered.

      2. I was always under the impression that NI was the same as income tax, just under another guise. It could be me being cynical though. But we need a government that lead and is not afraid to take bold measures. They do have five years for the nation to see the benefit. I’ll admit, politicians must tread carefully when it comes to public opinion, but still, they are elected to be bold. I’m adamant that this economy needs something drastic and tax cuts for everyone could provide the stimulus required to kick start it. But it remains an idea that I don’t think they’ll consider.

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