The state of the UK economy has stabilised in the past few months. The expectation is now for a period of near-stagnation, rather than outright recession.
While an improvement of sorts, this is scarcely a sunny picture. So it is unsurprising that as Budget day nears, George Osborne should be flooded with suggestions about how he can stimulate activity. While the chancellor’s room for manoeuvre is limited, he should give careful thought to these ideas.
The case for the coalition sticking to its deficit reduction targets remains as strong as ever. Anything that raised doubts in the market’s mind about its commitment would be counterproductive.
In such circumstances, the scope for stimulative measures is limited. There are two possibilities. One arises if the deficit falls more quickly than expected. Then the government can choose to spend the undershoot rather than beat its own targets. The second is to re-jig taxation and spending priorities, while living within the envelope of the consolidation plan. The objective is to make cuts or increase taxes in areas that least affect demand, while focusing the funds freed up on those that boost it.
The first of these options has come into focus with news that borrowing this year may come in some billions shy of the level forecast by Mr Osborne last autumn. There seems little point in using what would be a one-off gain to reduce debt faster. Better to put it back into the economy. Temporarily reducing national insurance to encourage private-sector hiring or increasing investment spending are two possible uses.
While welcome, however, the impact of this windfall would be small. More could be wrung from pursuing the second option. Several plans have been floated in recent days, including one by Liam Fox, the former Tory minister, that would cut current spending harder to reduce national insurance. As an approach this might have merit, although it would be important that any cuts had the smallest deleterious effect on growth. Another idea, promoted by the more left-leaning Social Market Foundation, looks at raising taxes to fund a stimulus.
Such calls are now routinely heard across the political spectrum. There are political and economic consequences for Mr Osborne to weigh in considering how to answer them. But if there are better ways of allocating taxes and spending to get more growth for the same amount of deficit reduction, both the politics and practicalities behove him to try.