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Budget 2013: Growth is the Key

The 2013 Budget had some good measures. These included the £2,000 employment allowance to help jobs, abolishing stamp duty on AIM to address the issue of growth companies listing elsewhere, £3 billion allocated for infrastructure and a further increase in the personal allowance to £10,000 from next year. All of these were small steps in the right direction.

The official growth forecast of 0.6% for this year may again be wrong, as in recent years, but this time by being too low, rather than too high. Previously announced measures, such as the increase in personal allowances to £9,440 and the cut in the top rate of tax to 45%, which feed in this April will be a big help, as would stronger global growth.

Yet, despite all this, the Budget should have been bolder. The deficit is still too high and, until there is a return to surplus, which is not on the cards, the country’s debt will continue to rise. The best way to reduce the deficit is growth. Yet the economy is still weak and its biggest problem is a lack of demand. The Budget did not do enough to address this.

In the immediate wake of the crisis, too many forecasters were saying the economy would return to growth soon. This took the pressure off the need for radical reform when it was needed. The trouble is the economy did not rebound strongly. One thing that is still needed is a clear vision and narrative of what lies ahead if radical policies are pursued: a revitalised, rejuvenated Britain that prospers in a changing global economy. In this Budget the Chancellor’s opening narrative was good: there is no easy way out but we need to compete globally.

The challenge from recent years is that there has been the wrong type of austerity. Instead of addressing public spending, it was taxes that rose. Add in sluggish wage growth and the problems that come with a weak pound policy, where we have imported high food and energy prices, the net effect has been that people have seen their spending power eroded. The lesson is to get taxes down – indeed the economy needs low, stable, simple and predictable taxes.

In coming years the squeeze will be on spending. Effectively, there are now three areas of spending: ring-fenced areas of health, overseas aid and education; other departmental budgets that are not ring-fenced; and annual managed expenditure, which includes debt interest, welfare and the automatic stabilisers, which will continue to rise until the economy recovers to stronger growth. The Chancellor announced a cap on the growth of such annual managed expenditure, that made sense, but it may be hard to achieve this. Thus of these three areas it is the non-ring fenced areas of spending that are to be squeezed.

There is a need to differentiate between recovery and reform. Although there is naturally some overlap they are different issues. Reform includes issues such as moving to a more effective smaller sized state, ensuring the poor are protected through better targeted help and also boosting UK productivity, so that future trend growth rises, and an enabling environment for business. And in many respects this Budget is trying to do this, with some good supply-side measures included.

Given that a lack of demand is the biggest problem in the economy, the Budget needed to encourage people to spend and firms to invest and also to ensure the Government boosted infrastructure. In this respect, there were some positives, but there is a need to move faster, further and sooner. The infrastructure spending needed to be bigger and bolder. In an economy of £1.5 trillion, a boost to capital spending of £3 billion is tiny. The June Comprehensive Spending Review allows scope for more.

There is a need to get the deficit down. But there is also a need to look at the quality of government spending as well as the quantity. A government that borrows at cheap long-term rates to fund a massive construction boom to build affordable housing and necessary infrastructure is doing the right thing for the economy particularly if it works with the private sector. The Olympics showed what can be done.

The real winner from the Budget was the Bank of England. Not only has monetary policy already been the shock absorber for the economy but this Budget – with its 62 page “Review of the Monetary Policy Framework” – allows scope for even more.

Whereas there is a case for more radical measures on fiscal policy, it was on monetary and credit policy that this Budget showed radical strands. This includes a credit scheme aimed at getting people onto the housing ladder. There are issues around this and I would have preferred to see the government borrow to kick-start a massive construction boom or even decide to direct stamp-duty receipts back into housing. But on the monetary side the issue is the lack of lending, and the Chancellor is doing all he can to boost this.

Given the constraints on the fiscal side, it is not only monetary policy that acts as the shock absorber, but there is also the need to restore confidence. Ahead of the crisis there was an age of excess, with much wasteful government spending and high private borrowing. In recent years the focus has been on an age of austerity, with a focus on tax hikes. Now, to restore confidence, we need an age of enterprise. This needs to be backed up by an environment that encourages the private sector. This Budget took some steps towards that, for which it should be applauded but more is still needed. Confidence, like demand, is the key.

*Dr Gerard Lyons is Chief Economic Advisor to Boris Johnson, the Mayor Of London.

Dr Gerard Lyons

Dr Gerard Lyons is an international economist and Chief Economic Strategist at Netwealth Investments, having previously served as Chief Economic Adviser to Boris Johnson while he was Mayor of London. He was Co-Founder of Economists for Brexit and is co-author with Liam Halligan of Clean Brexit (Biteback, 2017). For Politeia he was co-author of Banking on Recovery: Towards an accountable, stable financial sector (2016).

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