A political budget – one for the short term economically not the long

Nothing announced in the Budget on Wednesday was a surprise because it was all leaked in advance. But that did not make it any less surprising in one regard: the lack of any bold action to deal with the economic challenges facing the UK of an aging population, poor productivity, the need to reform the NHS, and how to fund public sector spending.

Titled a ‘Budget for long term growth’ it was in fact a Budget for a General Election in the Autumn – 14 November anyone? – and for the short term. Admittedly, none of the changes required will be easy for any government: to reform the planning system to build more homes and commercial property where business need them and critical infrastructure for clean energy, a move to a more continental system for funding the NHS, decentralising decision making to more local bodies, and more, were not even discussed.

The tax cuts in the form of two further percentage points off national insurance contributions – following the cuts announced in November– the freezing of fuel tax duty and a reduction in capital gains tax for property transactions are outweighed by tax increases elsewhere. In a blatant political move that raised £2.7bn, ‘non domiciled’ tax benefits were limited to 10 years rather than indefinitely; and the tax on energy companies was extended for another year. But personal tax thresholds remained frozen. The latter raises over £40bn by 2025/6, far outweighing the tax give away of £10bn announced in the Budget. It drags a further 7million people into paying more tax over the next five years.

On the economic front, growth was lowered to just 0.3% for last year and raised 0.1 to 0.8% for this year. Forecasts for the following 4 years hover around 2% a year. A ray of good was that consumer price inflation is expected to be under 2% in a couple of months and the longer-term forecast shows the UK hitting the 2% target.

That means interest rate cuts in the next couple of months and a lower forecast by the OBR for short- and long-term rates compared with their November projections.

But the spending squeeze will continue, with more real term cuts in already beleaguered local authority services to come. With public sector funding limited to 1% a year in real terms, and given the protected status of health, education and defence, it means lower infrastructure investment and cuts to a range of other services.

All these longer-term challenges were ducked and left to whichever party forms the next government. If that, as seems likely, is Labour, then their first challenge is that there really is no money left and bold action will be required to raise some in the short term and encourage growth in the long term,

On first read, sectors that benefit from lower interest rates will like it, and the spending boost from lower NI will be welcome of course, but the big picture is of continued stagnant economic activity. Financial markets may be ambivalent about the Budget as overall it has not changed perceptions about economic trends much – if anything it appeared mildly positive. But, as ever with Budgets, a closer look at the numbers over the next few days could reveal hidden problems.