My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
This week’s budget, it can be safely said, will be disappointing. George Osborne’s fourth risks being his most discordant yet.
It will be disappointing on growth. Weak fourth quarter gross domestic product and January’s awful manufacturing and construction numbers mean the Office for Budget Responsibility will revise down growth forecasts it made only three months ago.
It will be disappointing on borrowing. Unless Osborne has come up with another fiscal trick, his autumn statement triumph of announcing a drop in the budget deficit this year, badly wrongfooting Ed Balls, will have proved shortlived.
Both Osborne and the OBR will have egg on face if, as is likely, this year’s outturn is instead heading for an overshoot of several billion. It should be an open goal for Balls.
It will be disappointing in content. The more the chancellor is constrained by the deficit overshoot and the loss of the AAA rating, the more strident the demands have grown. To call some of those demands naive scarcely does them justice.
Perhaps a Tory government unencumbered by coalition could have slashed spending in its first three years, a Canadian-style short, sharp shock to cut the deficit faster and leaving room for the deep tax cuts beloved of the party’s right-wingers. It did not happen then and is not going to happen now.
Similarly, there are those who would have liked Osborne to emulate the Denis Healey of 1974-5, expanding spending when everybody else was showing restraint, and driving Britain into the arms of the International Monetary Fund.
It would also have been good then to seek an alternative to the big cuts in capital spending inherited from Labour. But that did not happen either. Osborne will announce a further shift from current into capital spending on Wednesday and the big cuts are in any case now behind us. More capital spending will be a theme of the June 26 spending review (surprisingly announced ahead of the budget).
I would be surprised, however, to see a big and explicit increase in borrowing to pay for more infrastructure. That would be too close to a Plan B to present it as a continuation of Plan A, particularly after last month’s ratings downgrade by Moody’s.
Any activism, it seems, will be on the monetary side, with speculation focusing on a looser inflation target for the Bank of England and the new governor, Mark Carney, being given carte blanche to do whatever it takes to boost the economy.
How disappointing will the numbers on Wednesday be? John Hawksworth of Price Waterhouse Coopers expects an £8bn borrowing overshoot this year - so not even close to the deficit reduction officially predicted in December - and for similar overshoots to carry forward to future years.
As for growth, Ross Walker of RBS expects the OBR to predict 1% growth this year, 1.8% next. These forecasts are down marginally on the autumn statement predictions but well down on a year ago, when they were 2% and 2.7% respectively.
What can Osborne do to make his budget less disappointing? He has to do a better job defending the government’s srategy than David Cameron did 10 days ago. To those who say austerity has been a failure, he could point as the Institute for Fiscal Studies did in its green budget to the alternative of Britain’s public sector debt being propelled on an unsustainable path, taking it first to 100% and then to more than 200% of gross domestic product.
The alternative might have been a full-blown fiscal crisis, an International Monetary Fund programme, many ratings downgrades and 10-year bond yields closer to Italy’s (BBB+ rated) near-5%, rather than below 2% as Britain’s are.
Though GDP continues to disappoint, it is not hard to think of an alternative in which employment growth would have been weak or non-existent and unemployment, instead of being under 8%, closer to the eurozone’s 12%, or even the higher rates among its weakest members.
So things could have been worse, but that is not much to build a budget around. What else should there be? I would like to see five things.
On tax, Osborne has spent many billions raising the personal allowance towards its £10,000 target, heading off increases in petrol duty and moving towards a target corporation tax rate of 20%.
All have merits but also shortcomings. Raising the personal allowance is a stealth tax cut. Most do not notice it, while they did notice the 2011 Vat hike. Postponing duty hikes, similarly, means petrol prices have merely risen somewhat less steeply. Business has not responded to lower coporation tax with an investment boom.
So, to the extent that there is any money at Osborne’s disposal, and there always is a little, it should be targeted at specific incentives to get firms to invest in new capacity and home-owners to invest in job-generating home improvements.
On infrastructure, I can’t understood why, when so much of the 2010 Tory mainfesto was torn up for coalition reasons, the commitment on no new airport capacity in the south-east remained sacrosanct.
That is unjustified and the most positive infrastructure signal Osborne could send now would be a commitment to build a third runway at Heathrow. A new London airport in the Thames Estuary is, like HS2, a project for later. We cannot wait that long.
On housing, a proven generator of jobs and growth, progress is being made, via the Funding for Lending scheme (FLS) and an array of other initiatives aimed at first-time and new home buyers.
These should be expanded and talk of redirecting Funding for Lending away from housing forgotten. Social housing has a big role too. Housing associations have been bypassing the banks, raising money directly for new developments through bond issues. We need much more of that.
As for small and medium-sized firms, the FLS is the latest in a series of damp squibs for the sector. While some banks have broken through the barrier of mutual suspicion, others have not, or do not want to. The case for direct lending, giving a government-backed business bank genuine financial welly, grows stronger by the day.
Finally, on the Bank of England, Osborne should be wary of changing its remit in a way that endorses a permanent inflation overshoot but he should encourage the Bank to think more imaginatively about ways of boosting growth.
I would get the Bank to take an active role in building markets for securitised (packaged) small business loans and infrastructure bonds. These and housing association bonds could be swapped for some of the £375bn of gilts the Bank has bought under quantitative easing. Whether this would succeed in generating growth we do not know. You never know until you try.