In June 2010 the Office of Budget Responsibility forecast 2.9% growth in 2012-13, 2.8% in 2013-14 and 2.7% in 2014-15. In the 2013 budget they forecast 0.2%, 0.8% and 2% for those years. The total growth of 8.6% has fallen to just 3%.
The original strategy rested on increases in total public spending in cash and real terms for the first two years, followed by a small real decline in the second half of the Parliament. They have kept more or less to budget, with a modest underspend recorded for 2012-13. The structural deficit was to be eliminated by 2015 by a large increase in tax revenue.
This budget confirms that tax revenue has fallen well short. In areas like higher end Income Tax and CGT the higher rates of tax have done damage. The government estimates that the 50p tax rate has lost the Exchequer £7bn a year as a result of very high earners leaving the country. Tax revenues generally are below forecast owing to slower economic growth.
By 2014-15 tax receipts are estimated to be £62 billion lower in 2014-15 than the June 2010 forecast. Borrowing will be considerably higher as a result.
The budget seeks to speed growth to achieve the delayed increases in growth rate the government is seeking. They propose to do this by a combination of targeted tax cuts, monetary expansion, improved flows of finance for the mortgage market and a general income tax cut to boost family incomes. Petrol and beer duty area protected from further rises, and 1p is taken off beer duty per pint. The tax cuts are financed by additional public spending reductions, to avoid making the deficits worse.
The budget in itself is modestly positive for the economy. The numbers involved in the tax reductions are small, reflecting the Chancellor’s limited scope to offer changes given the poor overall fiscal arithmetic.
Two items that did not get fully dealt with in the Budget matter more. One is the future ability of the banks to finance recovery, and the other is the question of energy prices and supply. The Chancellor says he will improve and extend the Funding for Lending Scheme, as well as introducing his plans to help people buy new homes on mortgage. There are welcome signs the housing and mortgage markets are beginning to improve, and this could help further.
The second is the high cost of energy to industry, offices and homes. The Chancellor has promised to remove the carbon levy from the big energy using businesses, for fear of losing them from the UK if he perseveres with it. He sounds as if he wants to do more, but EU rules and Parliamentary opinion in the Lib Dems and Labour constrain his room for action. The UK needs immediately to extend the useful lives of its coal burning power stations, but the Chancellor was silent on this matter in the Budget.
This post is tomorrow’s post, put up early. I will post my Budget debate speech in the Commons tomorrow when the Hansard is available. It includes the figures showing real public spending has risen so far under this government.