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When the chancellor avoids boasting about the country’s economic future under his stewardship, it is a telling sign that the picture is fairly bleak.
Last month’s “Budget for growth” was much hyped, but the following day George Osborne appeared on BBC Radio 4’s Today programme warning that growth would “not [be] spectacular”.
Mr Osborne has little option but to admit the economy is not in great shape. The independent Office for Budget Responsibility, which he created, has downgraded its forecasts for growth this year and next, and sharply raised its predictions for inflation. Inflation is now expected to be between 4 per cent and 5 per cent for much of this year, more than double the Bank of England’s target.
The coalition government has the great excuse of the worst recession since before the second world war, and the worst position in the public finances since the years of demobilisation in the second half of the 1940s.
An unexpectedly weak end to last year underlines the risks of relapse still facing the economy, while surging oil and commodity prices threaten to hurt consumers and businesses alike this year.
The OBR reckons this recovery will be weaker than those following the shallower 1980s and 1990s recessions, with growth below 3 per cent every year over the next five years. Contributing to the disappointing outlook will be the cuts and tax rises, the shortage of credit and the paying-down of debts among households and companies.
The first two quarters this year will provide a guide to how well the economy is handling recovery in a time of cuts. If the first quarter does not show a sizeable rebound after the contraction at the end of 2010, growth could be even weaker than the OBR predicts.
From this month, deeper cuts in spending and further job losses will start to arrive.
At the moment, none of the leading forecasters are predicting a double-dip recession. The average forecast of growth of 1.8 per cent this year and 2.1 per cent next year is little different from the OBR’s prediction of 1.7 per cent in 2011 and 2.5 per cent in 2012.
David Kern, chief economist at the British Chambers of Commerce, which represents many small businesses, says: “The economy is still fragile, but I think we will avoid another recession.”
But even if the Budget could not help the short-term circumstances of the economy while sticking to a pre-configured strategy of rapid deficit reduction, the measures announced appear unlikely to have a huge impact.
Mr Osborne said his “Budget for growth” would help “create the stability and now give the entrepreneurial boost to get us into the prosperity we all want to see”. Ironically, the OBR did not alter its view of how quickly the economy can grow in the long term in light of the new policies announced by the chancellor. “We judge that there is insufficient evidence at this stage to adjust our trend growth assumptions in light of these measures,” the fiscal watchdog said.
A poll of more than 800 members of the Federation of Small Businesses showed that most thought the Budget would have no real impact on the day-to-day running of their businesses.
“The Budget has not hurt small businesses, but it won’t help them grow either,” says John Walker, national chairman of the FSB.
Some of the promised changes – such as speeding up the planning process, simplifying the tax regime and cutting red tape – could help in the long run, but remain vague at the moment.
Stephen Robertson, director-general of the British Retail Consortium, says making planning faster and easier “could be a major step forward for investment and therefore jobs”.
There were some important measures in the Budget for businesses, and some more limited initiatives aimed in particular at smaller and medium-sized firms. Mr Kern welcomes the larger-than-expected cut in corporation tax. He also says the reduction in fuel duty now and in the future will help small businesses in particular or those with high transport costs, where fuel is a larger proportion of costs.
But, as might be expected of a “fiscally neutral” Budget, many of the specific and costed measures are far more piecemeal. The reintroduction of enterprise zones, the extension of business rate relief for small companies and a promise of an additional 50,000 apprenticeship places may offer a minor boost to small businesses.
And it was not all good news. The raid on oil companies could affect North Sea oil investment. Lee Hopley, economist at the EEF engineers’ group, argues that the introduction of a price floor for carbon as part of an effort to build the market in carbon trading will hurt manufacturers.
Mr Osborne is not the first chancellor to set out to create growth – in fact, it is hard to think of a chancellor who has not claimed this goal. Geoffrey Howe said that his 1982 Budget was “a Budget for industry – and so a Budget for jobs”, an emollient offer a year after his 1981 Budget controversially sought to raise taxes during a recession to combat a growing hole in the public finances and was regarded as doing little to stem unemployment.
It did not turn out that way. History shows that manufacturing and jobs were two of the areas in the UK economy that suffered most in the early 1980s. The decade was a period of record unemployment and unabated industrial decline.
Mr Osborne and the country will have to hope that his second Budget, for growth, after his first, for cuts, does not suffer a similar fate.
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