George Osborne continues to make the same error he made in previous budgets. He is assuming the British economy will return to robust growth from 2014 onwards and that this will deliver the higher tax revenues needed to achieve his deficit reduction plan. The Office for Budget Responsibility now predicts growth of 1.8% in 2014, 2.3% in 2015 and a very healthy 2.7% in 2016.
Forecasting growth accurately is of course very difficult. Indeed it is instructive to look back at previous projections to see just how inaccurate they can be. Back in 2010 the Office for Budget Responsibility (OBR) got it completely wrong, predicting a strong recovery for 2012 and 2013, with growth at almost 3% per year.
Assuming strong medium-term growth is of course highly convenient in political terms. It means that the Chancellor can rely on higher tax revenues for the lion's share of his deficit reduction plan. Spending cuts can be modest.
But, as is becoming increasingly obvious, this is a very high risk strategy. Osborne's gamble on growth has meant that the budget deficit will remain at dangerous levels for much longer. The deficit is likely to be around 7% of GDP this year, higher than in some of Europe's PIGS.
The UK has already lost its AAA credit rating. If growth continues to disappoint, there could be further downgrades. And if there is little sign of the deficit shrinking, investors will demand a higher risk premium for holding bonds. An increased share of public spending would go on interest payments, increasing the danger of a debt crisis.
In this context, today's budget was a lost opportunity to implement policies that would have reduced the deficit and promoted higher growth. While there were some modest measures to limit spending, for example by extending public sector pay restraint, more radical action was avoided. A wiser Chancellor, taking precautions in case strong growth failed to materialise, would have looked to make large savings by, for example, scrapping the ring-fencing of school budgets and foreign aid, and reducing benefits for families with children. (The latter may be unpopular, but it should be remembered that such payments were increased substantially under Gordon Brown). This budget could also have reassured markets about the long-term prospects for government borrowing by cancelling wasteful big-government projects such as Trident and High Speed 2.
The scale of the deficit gave Osborne little room for manoeuvre to cut taxes. Nevertheless, he could have made reductions where it is likely that rates are beyond their revenue-maximising point and therefore entirely counterproductive. The planned reduction in Corporation Tax to 20% is one sensible move. But reducing the 45p top rate of income tax would also have benefited the economy by incentivising wealth creation, without making much difference to the short-term tax take.
Most disappointing of all, though, was the failure to address the tidal wave of regulation that is suffocating the UK economy. If anything this budget has made the problem worse, with further complexity introduced into the tax system through new allowances for favoured industries and yet another crackdown on tax avoidance. The Chancellor also consolidated the coalition's commitment to the environmentalist agenda, with subsidies for carbon capture and storage projects as well as low-emission vehicles. Little was done to tackle the rising cost of basics such as energy, transport and housing which is being driven ever higher by green regulations.
While slow economic growth is partly the result of external conditions, such as the eurozone crisis, it is also to a significant extent self-inflicted. The 2013 budget did little to protect the UK from future debt problems or to reverse the harmful government policies that are choking off economic growth.