Squeezing the Economic Lemon Dry: Another No Growth Budget
Thursday 21 March 2013
Dr Andrew Mason Lecturer in Finance at Surrey Business School gives his insights into the Chancellor’s budget.
The economy was making its first tentative steps to recover from the 2007-8 Financial Crisis when the Chancellor took office in 2010 but what has he achieved since then?
If we think of the economy as a lemon the economy was already being squeezed hard by post-crisis deleveraging and the economic problems of Europe, Mr. Osborne’s austerity programme seems destined to squeeze every last drop of juice out of the economy. Whilst acknowledging the need to bring the government deficit under control we have to question the timing of such a measure and its effectiveness. As the chart below shows any real signs of economic recovery have been sporadic at best.
Today’s budget shows little sign of light at the end of the tunnel:
2013 will be the fourth consecutive year when GDP growth will be less than 1%, with unemployment forecast to remain around the 8% level until 2016.
Consumer spending, the largest part of the economy, is not expected to recover to normal levels until 2014. It is only forecast to grow 0.5% in 2013! Which does not suggest a high level of consumer confidence.
A recovery in fixed investment is forecast from 2014, but again lacklustre growth is expected this year, only 2.2%. The new housing measures announced in the budget, although welcome will be very dependent on take up and consumer confidence which will be overshadowed by high unemployment and the need for the consumer to deleverage. From 2014 investment in housing is expected to grow by 9% or 10% a year for the foreseeable future. Perhaps more puzzling is the recovery in business fixed investment which is forecast to grow 1.9% in 2013 and then 6.1% in 2014, with 8.6% growth pencilled in for the rest of the forecast period. Is there anything in this budget to inspire business confidence?
Infrastructure spending increases which are to be welcomed don’t come in the immediate future but are again delayed.
Mr Osborne has nailed his colours very firmly to the mast of austerity, but he doesn’t seem to be delivering; every budget the reduction in public debt as a proportion of GDP peaks at a later date. We’re now told that Public Sector Net debt will rise from 79.2% of GDP in 2013-24 to a peak of 85.6% in 2016-17, with cyclically adjusted borrowing continuing to grow more rapidly than GDP until 2016-17.
Perhaps a new policy can only come with a new Chancellor?
So what of the budget sweeteners?
The housing measures are to be applauded, but take-up will remain an issue.
The freeze on fuel duty is to be welcomed but this is of course a decision not to implement a hefty 13p increase in duty which was planned for September rather than an actual reduction.
Reducing general beer duty by 2 per cent from 25 March 2013, worth 1 penny on a pint of beer will not be noticed at the bar or in the supermarket. If 3 bottles of finest British Beer are sold on more or less permanent promotion at £5 will the price change at all?
We must welcome the measures which are aimed at provision of social care and residential care for the elderly but why has it taken him four budgets to address this issue.
Overall I can find little evidence that the Chancellor’s policies are working and draw little optimism from this Budget.
Andrew Mason 20/03/2013
