Lack of Budget action may come back to bite the chancellor

8 Mar 17

This was a “warm-up” Budget, with many key decisions deferred, delayed or scheduled for review. The chancellor may yet regret this lack of decisiveness

The chancellor confirmed in today’s Budget statement what was extensively trailed beforehand. As expected, he included a ‘modest short-term giveaway’ (in the words of the OBR) to ameliorate the political issues of the day – social care funding pressures and steep hikes to business rates – but he’s opted not to spend in full the fiscal headroom the latest forecast has given him Instead, he’s holding back so that he has the space to borrow more and still keep to his fiscal rules should Brexit risks materialise.

Given the unusual degree of uncertainty around the forecast, it’s undoubtedly a good idea to avoid using any windfalls to fund small-scale giveaways. But in practice, holding off on acting now in anticipation of the worst possible eventuality will mean any move to boost the underlying performance of the economy would kick in too late to have the desired effect. This would leave the chancellor with only ‘sugar rush’ options, such as tax cuts, if he wants to head off a recession.  

To understand why, consider the impacts that a ‘bad’ exit from the EU would have on the UK economy. It would in all likelihood hurt our productivity growth (which is already disappointing); increase our trade deficit; and reduce our inward investment flows. To counteract these effects would require a wide-ranging programme of intervention to make the UK as attractive a location as possible in which to do business, taking in infrastructure investment, a profound rethink of skills provision, and action to build up domestic supply chains, which have withered given the ease of importing within the single market. None of these interventions would have an immediate impact on the economy – they would need to be deployed well in advance of being needed.

The chancellor has clearly concluded that there is no rush to do any of the above. Today’s Budget had the feel of a ‘warm up’. Reviews, pilots and green papers were all announced, and decisions deferred, potentially with a view to making a splash in the first Autumn Budget later this year. But hesitation is itself a decision – and the chancellor may have already reduced his options should action be required of him further down the line.

 

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