The Budget 2013: Will It Increase Growth?

by Fergus Houghton-Connell

After announcing the UK Budget on Wednesday, George Osborne made it clear that he wanted to continue with his main objective of reducing borrowing. This usually means more cuts, which there are, however Osborne has included a few measures to try to make it easier to buy homes, to increase the disposable income of the poor, as well as increasing spending on infrastructure. So, will it work or do we face many years ahead of a ‘flat-line’ economy, or even a triple-dip recession?

Most government departments face a 1% cut in their budget for the next two years, with the NHS and schools being exempt from the cuts. Essentially, the chancellor is trying to squeeze every penny out of the government as possible, without having to borrow any more money, which I believe is the right move. Almost all government departments have underspent in their budgets in the last few years, so instead of letting the departments spend more than is necessary, why not use the extra cash on infrastructure projects and other areas that will increase Gross Domestic Product (GDP). Overall, £11.5 billion of cuts are expected in the 2015-2016 Spending Review, a significant amount that can be reinvested in trying to increase Growth in the economy.

On the whole, I see three areas that are likely to increase Growth. Firstly is the Government’s plan to kick-start the housing market. Buyers of homes will only have to pay a 5% deposit, much lower than what some banks demand, and the ‘shared equity’ scheme, which offers people a 20%, of the value of the house, interest free loan on newly built homes. The idea is to try to get more people buying homes, thus increasing Consumption and therefore GDP. It does come at a cost, but this will be mostly covered by the spending cuts in other areas, and there are still questions as to whether it will really increasing the demand in the housing market.

Secondly is the refund of the first £2000 of the National Insurance that businesses have to pay for employing people. For large companies, this will have almost no effect, but for small businesses, who employ around 50% of the workforce, this is quite substantial. It means that small businesses can employ more people, as it is now cheaper, and this makes up part of the prediction that there will be 600,000 more jobs available this time next year, as well as the claimant count, the number of people who claim benefits, will fall by 60,000.

Thirdly is the new spending on infrastructure. £15 billion more will now be spent on infrastructure by 2020, with £3 billion to be spent by 2015-2016. The idea behind this one is to pay companies to work, who will then employ more people to complete the job and then tax revenues from income tax and corporation tax will increase, with the added bonus that the government are going to have to borrow only £2.5 billion more, it seems that this is a win-win situation. However recent studies by the Office for Budget Responsibility (OBS) have shown that spending on infrastructure could contribute as little as 0.06% towards GDP.

There are other policies that I don’t believe will have a big effect on Growth, at least in the near future, which include the reduction of Corporation tax by 1%, the reduction of the highest tax percentage to 45% from 50%, the 20% tax relief on childcare up to £6000 per child and the earlier than planned increase in the personal allowance, the amount you earn that you don’t have to pay tax on, to £10,000. I feel that these are all positive policies to try to increase the disposable income of families, as well as encouraging businesses and rich people to live in the UK, but the effects of these policies will be felt in a few years time I feel, because consumer confidence is still very low. Nevertheless, they are good policies.

If I’m honest, I find this Budget quite boring, at least in economic terms, and, as perfectly summed up by BBC’s Nick Robinson, a ‘political budget’. George Osborne is trying to show that he can run the country whilst borrowing a lot less than Labour would, if they were in charge, which some would argue is the only thing he will be left to stand on come the election next year. However I believe that the policies the chancellor has actually proposed can be effective. I believe that the chancellor’s main objective from the Budget is to increase employment; one of the few successes last year, whilst still keeping the amount the country borrows relatively low, which he has achieved last year and looks set to continue to achieve this goal next year too.

As shown in the diagram, the Growth forecasts are on an upward trend, clearly a sign that the economic policies of the Tories are working; with the added bonus that borrowing is expected to decrease every year for the same time period. If Labour were in power, Growth would probably be a lot higher, however debt levels would be much higher than they currently are too. Overall we will just have to wait until the quarterly growth figures are released to see if any of the policies will work. In the mean time, we just have to remember that Growth looks as if it can only go up.