George Osborne was able to announce some strong forecasts in his fifth Budget today. But the biggest worry for the chancellor is that interest rates go up before the next election
At last we have economic forecasts that are starting to look healthy. Growth projections in the 2014 Budget are good and don’t look too optimistic. Inflation remains subdued. To some extent the fiscal numbers are at least looking less bad.
Of course, this has to be seen in context. The level of GDP looks set to recover to the level pre the Great Recession towards the end of the year, a lot later than in most of our competitor countries. So it is not really surprising that UK growth is going to be one of the better performers in the OECD over the next two years and beyond.
And projecting sub 3% growth for the next two years after such a deep recession is slightly depressing: usually we would expect a few years of 3%+ or even 4%.
Projecting forward is not easy and, in this area, the Chancellor and the Office for Budget Responsibility may be being a bit complacent.
The underlying question is whether we have a well-founded, strong, balanced economic recovery that can deliver decent growth rates year on year, or whether the growth we are seeing is too heavily based on consumption, on the housing market, and in London and the South East, and therefore will be unable to continue in the medium term.
This is also the last Budget that can actually make a difference to anything real before the May 2015 election – next year’s Budget will just be intensely political, all about signalling, ’bribing’ and positioning. So it is not surprising that we have some goodies targeted at key voting groups.
Some of the proposals on encouraging employment and business are like that, as is the continuing rise the in the personal allowance - badly targeted though it is.
It is also not unexpected that Osborne has tried to respond to Ed Miliband’s cost of living challenge with a few popular tax moves, although a bingo tax feels a bit 1970s. The new pensioner-aimed ISA pitches at the key older-voter population, suffering due to low interest on their savings.
But the biggest worry for the Conservatives would be that interest rates go up before the next election. The public have got so used to low interest rates they will be shocked, scared and angry when rates rise from their record low of 0.5%.
Cynics think that the Canadian governor of the Bank of England is too shrewd a political player to let that happen, but Osborne must do nothing that makes it easy for the Monetary Policy Committee to raise rates. This Budget was therefore cautious in this respect, taking action to reduce some elements that push inflation up (like fuel prices) and making a virtue about continuing fiscal cuts.
Rightly there is little change in the fiscal stance in this Budget but a lot of fiddling around. Whether it works for the economy or the electorate will be interesting to see.
