The Blog

A Budget for Borrowing, Bubbles and a Thimble of Beer

All in all, the problems are mounting. The economic plan has not delivered what was promised, people are feeling the pain, but without the promised benefits being delivered.

As the smoke clears and the dust settles, we can begin to see more clearly where last week's Budget leaves us. I think four over-arching points have emerged:

First, the economic situation is deteriorating and the government's plan is not delivering.

The news last Wednesday was that all economic indicators were moving in the wrong direction. Unemployment, borrowing and debt were all revised up; while growth and living standards were revised down.

Growth expectations for this year were cut to 0.6%, rather than the healthy 2.9% the Chancellor was banking on back in 2010. This is now the worst economic recovery ever recorded in Britain including the 1930s depression. And failing to get growth going means the Coalition are borrowing nearly £250billion more than they planned.

With suppressed private sector demand and Europe already showing signs of problems in 2010, it was always a dangerous strategy to chill confidence and cut too much demand from the economy quickly. We are now seeing the results of that bet.

Secondly, this budget won't do much to help the economy.

Some of the measures are welcome in themselves, in particular, the tax break for small businesses employing their first few members of staff. With youth unemployment up to nearly one million, real action to support jobs is clearly needed.

Other measures were just good old fashioned populism like taking a penny off the price of a pint ("Chancellor Special Offer: buy 300 pints, get one free!").

However, taken as a whole, none of it will have any appreciable impact on growth. The Office of Budget Responsibility (OBR) who George Osborne set up to provide independent assessments, concluded the budget:

"will have a broadly neutral effect on the economy, with no impact on the level of GDP at the end of the forecast horizon". (Box 3.1)

Which is a polite way of saying it does nothing for economic growth.

Thirdly, the impact on people is already tough and will continue to be tough.

The Institute of Fiscal Studies concluded that despite the moves on personal allowances and other measures, households with children will be more than £2000 a year worse off from the government's tax and benefit changes by 2015. This doesn't include losing out from reduced public services.

It also doesn't reflect the squeeze in people's incomes. This week, the OBR also revised down growth in earnings to 1.4% for this year while prices are expected to rise twice as fast, at 2.8%.

Analysis by the Resolution Foundation finds that median wages will have fallen over £3000 in the last few years.

In total, people's real living standards are falling and the failure to get growth going again mean the squeeze will go on for longer than necessary.

Fourthly, there is an emerging tendency of the government to simply build up future problems.

Take the housing package this week which I tweeted about last Wednesday:

"#Budget2013 most surprising gambit is the big bet on reinflating asset price bubble in housing market using off-balance sheet govt loan/guarantees"

As this policy comes under scrutiny, the causes for concern grow.

There clearly is a housing shortage in the country, but this isn't where the government has directed its big bet. Instead the bulk of the money is directed at providing guarantees to underpin £130billion of mortgages. There are very few restrictions on the scheme: it's not limited to new build, nor to people on certain incomes. Potentially it even allows second-home purchase and it includes houses worth up to £600,000.

As so many analysts have now concluded, the main effect is likely to be to push up house prices in an unsustainable way creating a bubble. It may make people feel artificially better off around the 2015 election, but only by risking a housing crash in the years ahead.

The US sub-prime crisis was caused in the same way by encouraging people to borrow more than was sensible and inflating house prices. To deliberately embark on this course again is dangerous.

This concern is being echoed by analysts across the political spectrum. Even Margaret Thatcher's favourite think tank the IEA has warned:

"the decision to provide further Treasury guarantees for mortgages is leading the government to get involved in exactly the sort of reckless behaviour that led to the failure of major banks in 2007-2008"

With housing completions at the lowest level for decades, the government's focus would be better directed at getting more houses built to enable people to get onto the housing ladder, rather than simply inflating the price of existing housing.

This is not an isolated example of storing up new problems for the future. Another was in November when the Chancellor decided that instead of paying the interest on government debt owed to the Bank of England, the Treasury would pay the money to itself. (yes, that is actually the policy).

But the impact on the public finances was to make his borrowing look better for the next few years but worse for future tax-payers and governments. A similar trick was done with Royal Mail pensions.

All in all, the problems are mounting. The economic plan has not delivered what was promised, people are feeling the pain, but without the promised benefits being delivered. And we now have a government that is feeling the pressure and responded by starting to simply store up new problems for the future.

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