"This Budget may appeal to some supply-side economists but, stripping away the bells and whistles, it is essentially neutral and has done nothing to fundamentally change the outlook. The economy remains in a deep hole and austerity will grind on well into the next Parliament."
For once the OBR hasn’t had to downgrade its forecasts and even found scope for an upward tweak to growth and downward tweak to borrowing projections. Things may not be getting worse, but they are not about to get much better either.
The downturn is already worse than the 1930s slump, when it took four years for GDP to return to its pre-recession peak. This time round, four years on output is still four per cent down and on current projections will not fully recover until sometime in 2014. The tightness of the public finances – Mr Osborne’s fiscal rules are judged likely to be met, but only by a whisker – means that there was little scope for a net giveaway. But broadly flat output over the last 18 months – and last autumn’s extension of spending cuts for a further two years into 2016/17 to compensate for the consequent revenue shortfall – hardly suggests that the policy of “expansionary fiscal contraction” is working as hoped. And the real test is yet to come. The bulk of the planned tax increases may already be in place but there is a mountain of public spending cuts to come.
The big question is whether private demand will expand to fill the gap. Experience so far is not terribly encouraging as exports have yet to take off and many businesses prefer to hoard cash rather than invest. The Chancellor must be hoping that a recovery in our major export markets, and a return to consumption growth as falling inflation boosts personal incomes, sparks the long-awaited investment boom.
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