A growth Budget overshadowed by disappointing growth
SO WHERE DOES the Budget leave us?
Take chancellor George Osborne’s own words: “From rescue to reform, from reform to recovery” as a guide and there’s little doubt he believes we’re locked into the reform stage for the UK economy.
The Budget did go some way to change the debate. The speech (sometimes a poor judge of a Budget’s content) fixed on growth as its central theme and hammered at it for all 57 minutes. Osborne’s intent was to leave voters and the markets in no doubt that he isn’t just a one trick pony banging on about cuts, but has indeed switched tack to get into the growth groove. Indeed, together with business secretary Vince Cable, the chancellor produced an entire report about growth that went out with the Budget papers. This was his effort to answer the critics and that the government is now targeted on getting Britain working again.
This is perhaps why Ed Milliband was so energetic and excited when he gave his response in the Commons. Faced with such a concentration he had to make a much bigger noise about the Budget’s failings, even at the risk of looking as if that’s all it was – noise.
But it was some specific industries that yesterday paid for this Budget. Osborne raided North Sea oil to the tune of £1.7bn this year and £2.2bn next. Banks also found they were being asked to cough up more to the tune of £630m this year (there are those that believe the 0.003% percentage point hike in the bank levy will actually raise more). Elsewhere the chancellor reckons he will raise about £800m through anti tax avoidance measures.
But then there were his give aways to business. Slashing the corporation tax rate is the flagship policy here with the centre piece a 2% percentage point drop from April this year, instead of 1%. That’s worth all of £450m. Altogether business measures, including moves on research and development, business rates, entrepreneurs relief, enterprise zones and science facilities give back around £800m this year.
In the scheme of things, and given the huge blow to the economy through the crisis, that is not a massive sum. But experts couldn’t help saying it was a start. It edged tentatively along the way to meeting the government’s plan to make the UK the most attractive tax environment in the G20 group of countries. But it didn’t do it all at once, that much is certain.
No, the tax experts believe there is still much more work to be done there and that the chancellor should not believe that bringing down corporation tax will achieve that aim all on its own. The tax system is about much more than that. The controlled foreign companies regime (CFC) is a case in point. Fiendishly complex and with final reform outstanding until May this year, many see CFCs as the key to persuading multinationals to use Britain as their base. Without significant adjustment here, the UK will remain an uncertain place to do business.
And then there’s the 50% tax band – another source of chagrin among business people. Osborne made clear he regards it as temporary, but how temporary? After all, he also said he wants to see how much it raises in revenues. But, sort those two issues out, CFC and the tax rates, and people believe Osborne really will start to make a difference. Get corporation tax to 20%, and well, you can see what a difference that could make.
So to get back to our question, where does the Budget leave us? Well, there was a lot of frenetic activity, a plethora of small things being done. And we have some strategic aims which go some way to fulfilling demands for a vision of where the economy might be going. Yet, we could still do with a full articulation of what kind of economy we are going to be, what our niche will be in the world, what it is that will make us better than others. Some sense that there is an understanding of what the technological and social demands of the future will be and how economic transformation will meet the challenge. How do we address the imbalances that made the Treasury and the economy over reliant on financial institutions? We seem to have to be groping our way to those kinds of answers but not yet fully acknowledging that we need to accept the questions as legitimate at all. And that, after all, is essential, if we really are in Osborne’s “reform” stage of the plan. And this will be critical to the kind of confidence that gets people investing and spending again. And confidence is key. Osborne can talk a growth plan but unless confidence is there, the plan won’t get backing.
So we come to the big cloud hanging over the Budget. Those revised growth figures. The forecast now is economic growth of 1.7% this year, instead of 2.1%. And this on the back 0.6% shrinkage in the last quarter of 2010. That’s a significant blow to Osborne’s claims that his policies are working. The Office for Budget Responsibility also said it expected this recovery to be weaker than those of the 80s and 90s, and that growth would not reach 3% for five years. This potentially undermines Osborne’s claim that we’re in reform mode. We’re still actually recovering and its slower and more painful than we first thought. If Osborne actually manages to hit a growth forecast the game changes for him and the economy. That’s the proof for the growth plan. Until then we’re very much in wait and see mode.