Only growth will get the deficit reduction on track

The ink is barely dry on George Osborne’s 20 March Budget but it has already begun to fade in the memory. Maybe that is as it should be – a chancellor with no money to play with cannot expect to leave a lasting impression – but Osborne and the coalition’s fourth budget was not entirely without relevance. Let me draw out some of the bits we should remember.

We learned, if we did not know before, that this is a highly political chancellor. Before the Budget, as before the Autumn Statement in December, it seemed inconceivable that borrowing in the 2012/13 fiscal year could be lower than in 2011/12. Osborne, however, strained every sinew, or got his officials to do so, to avoid the embarrassment of an upturn in borrowing.

So, by raiding every Whitehall piggy bank, shifting what spending could be shifted from 2012/13 into 2013/14, and using a few other tricks, he managed to avoid the red face I warned of last month. Underlying borrowing in 2012/13 was fractionally down, by £0.1bn, on 2011/12. Whether the Office for National Statistics will endorse that small drop when the final figures are published remains to be seen.

Was it worth it? I think not. Apart from the fact that it is not a good idea to massage spending figures to produce a desired outcome for one year’s budget deficit, the chancellor may merely have succeeded in drawing attention to the bigger picture, which is that the deficit has stopped coming down. Broadly speaking, public borrowing was £120bn in 2011/12, was £120bn again in 2012/13 and will be £120bn again this year, 2013/14. Not to put too fine a point on it, Osborne’s deficit reduction programme is no longer reducing the deficit.

What is needed to bring deficit reduction back on track? That is easy: more growth. In the 1990s, a strong recovery saw Britain go from a budget deficit of 8% of gross domestic product to a surplus in the space of five years. This time the deficit has come down from 11% of GDP but is stuck, according to the Office for Budget Responsibility, at between 7.5% and 8% of GDP. In the absence of good growth, cutting the deficit is very hard. Some parts of the economy are growing pretty well, including large parts of the service sector, but the overall picture remains disappointingly subdued. Did the Budget do anything to offer more hope?

The day of the Budget, I was talking about some of the measures it included, notably a cut in the main rate of corporation tax to 20% from April 2015 (and a unified system for small and large firms), an increase in the personal allowance to £10,000, also next year, and a new ‘help to buy’ scheme for the housing market. My contention was that, with no room for manoeuvre, Osborne had done as well as could be expected.

Then I was asked the killer question: would any of it provide the necessary boost to business and consumer confidence to kick-start spending? And the honest answer to that had to be no. What gives economies a lift? It is not, as we have discovered in the past few years, a case of lighting the blue touchpaper and standing back. Four years of a 0.5% bank rate, a 25% sterling depreciation and £375bn of quantitative easing have not done the trick.

The same is true of the measures unveiled in the Budget. One theme of Osborne’s chancellorship has been to make Britain attractive to inward investors, and to businesses already based here. That was the context of the cut in the top rate of tax from 50% to 45%, announced a year ago but enacted this April. It is also the context of the cut in the main rate of corporation tax from the 28% he inherited to the 20% rate that will apply in two years’ time. If tax incentives are effective, and I believe they are, this strategy will, in time, work. They will make businesses more likely to invest in Britain, and will set the basis for supply-side driven growth over the medium and longer term. For the moment, however, they are swamped by factors creating short-term uncertainty: the eurozone crisis, the limited availability of credit and the weakness of demand at home.

Similarly, the government’s reforms of welfare, alongside the raising of the personal allowance to £10,000, will leave the system in a healthier state than the coalition inherited. Work incentives will improve and, while job creation has been unexpectedly strong in the past two years, this will eventually sow the seeds of a better functioning labour market and a more productive workforce. The ‘help to buy’ scheme, which involves government guarantees for mortgages, while criticised by many, should provide a much-needed shot in the arm for the housing market over time.

For the moment, however, all consumers can think about is the squeeze on real incomes arising from the increase in energy and food prices, the overarching media and political message of austerity, and the continuing uncertainties. They, like many businesses, are not ready to switch mood yet.

At some stage they will, and the measures unveiled by Osborne in his latest and previous budgets should ensure that growth, when it comes, is more balanced and more sustainable than it was in the past. The irony for him would be if these slow-burn measures burn too slowly to benefit the current government and, instead, help the next one. It has happened before: Tony Blair and Gordon Brown inherited an economy in 1997 that had momentum and a reformed supply-side, and benefited from it. It could happen again.