In City parlance, George Osborne would be known as “High Beta” – a stock that soars one year, only to plummet the next and then rise again. His time in office has been characterised by repeated ups and downs; will Wednesday’s Budget help restore his political fortunes anew?
I frame the question as a political one, rather than primarily seeking to address the economics of the Budget, because in macro-economic terms what the Chancellor had to announce was neither here nor there. It is most unlikely to have much, if any, immediate or even medium-term effect on the health or otherwise of the UK economy.
In terms of its implications for consumption, investment and growth, there is not a great deal to say, and certainly set against Wednesday night’s relatively dovish statement by the US Federal Reserve, it is of virtually no consequence at all. This will have far more effect on financial markets and the outlook for the economy, even on these shores, than anything the Budget had to offer.
As for the politics of the Budget, the answer to whether it presages a political comeback for the Chancellor is no; in itself, it does not. In attempting to tiptoe around so many potential landmines – except big business, always a popular target which finds itself singled out for squeezing – he’s ended up with an incoherent mess that struggles to appeal to anyone.
But for the coming referendum vote, which has split the Tories down the middle, Osborne’s eventual coronation as leader and prime minister would have been a virtual certainty. Unhappily for him, Brexit has torpedoed his political prospects, and there must now be some doubt about the succession even if he wins the vote.
With the referendum looming, this was always bound to be a very difficult Budget for the Chancellor. At one and the same time it had to be both “true blue” so as to appeal to the party faithful and sufficiently middle of the road not to entirely alienate Labour voters, who he needs to turn out and vote “remain”. It’s as much the nation as a whole he has to appease as his own core supporters
A wafer-thin majority in parliament, making anything remotely radical vulnerable to defeat, has compounded his lack of freedom to act as he might wish. Both fiscally and politically, the Chancellor is stitched up like a kipper.
To make matters worse, the Office for Budget Responsibility (OBR) has significantly and most unhelpfully downgraded its forecast for trend productivity growth. What happened in the final quarter of last year is that there was a surge in the number of hours worked, but for no return in the way of enhanced economic growth.
Low productivity growth has become a significant downside to the otherwise unarguable merits of Britain’s flexible labour markets. The upshot is that the economy is struggling to show any productivity growth at all. This matters because it crucially affects tax collection, which is consequentially forecast to be lower than previously expected. To achieve his goal of a Budget surplus, the Chancellor has therefore been forced to patch things up with a further £13.7bn of spending cuts and tax increases that are substantially loaded onto the back end of the parliament.
Any fiscal forecast this far out is frankly not worth the paper it is written on. There are so many variables involved that it is almost by definition bound to be wrong. What is more, £13.7bn in the context of an £800bn budget is little more than a rounding error. All the same, the Chancellor is forced to go through the motions, in the hope that by the time we actually get there things may have improved and he’ll have scope to change things around anew. Regrettably, it is more likely that the economy will turn out worse than forecast, rather than better. Whatever happens, further significant adjustments to fiscal policy are inevitable.
Budgets are nevertheless important for their messaging. Even acknowledging the political constraints, and the perceived need for caution given the existential threat posed by the referendum to Osborne’s ambitions, this was a disappointing one. The opportunity for tackling some of the big, abiding issues facing the economy was ducked, for fear of frightening the horses, and the job of deficit reduction has once again been shunted out into a seemingly ever-receding future, even if a surplus is still miraculously conjured up in the forecasts for sake of appearances in the final year of the parliament.
Believe it when you see it. As for simplification of a tax code which has doubled in size to more than 10m words over the past seven years, there was no mention of that at all.
That’s not to say there weren’t good bits to the Budget. The further measures to encourage saving, the additional cut to corporation tax, the increase in income tax thresholds, the reductions in business rates, taking many small companies out of the net entirely – all these things were very welcome. It may also make some sense to close loopholes and abolish exemptions, as the Chancellor proposes, so that headline rates of business taxation can be cut.
Nor is it all bad news for big business, stung as it is by new restrictions on reliefs for interest charges and losses. Large corporations have won a two-year reprieve on accelerated payment of their tax bills. All the same, the overall impression is one of tinkering with the tax system for the purpose of raising money and creating supposedly desirable social and economic incentives.
Nowhere is this more obvious than the proposed “sugar tax” on the soft drinks industry, disingenuously billed as a way of protecting our vulnerable youth from the perils of obesity. How so when it is expected to raise £520m a year in revenue? The Treasury plainly doesn’t expect much effect either as a deterrent to consumption or as a spur to changing the product. And even if it does have these effects, why tax soft drinks and not sweets, chocolate, crisps and chips?
Osborne is a political survivor with some masterful Budgets to his name, but this was not one of them. It wasn’t the omnishambles of legend. The Chancellor has learned from the mistakes of 2012. But nor was it the showmanship of 2014, when the almost universally popular “pensions freedom” initiative was announced. This one lacked any such “wow” factor. We are told that this is largely because of the perceived need to play safe ahead of the referendum, in which case the fireworks have merely been postponed, rather than cancelled entirely. There is, perhaps, something to be said for “playing safe”. Whether it helps win the referendum is another matter.