See: www.strategiceconomics.co.uk
There are three aspects to any UK budget. In no particular order, there are:
The political context: the need to make policy that follows a particular political-economic philosophy, previous statements and mandates, and satisfies the Chancellor’s and the Premier’s party. We know the rhetoric: ‘there is no alternative’. It would be surprising if there was any significant deviation from the Coalition’s “Plan A”.
The macro context: the balance of effect on the economy as a whole from government spending and taxation. In its simplest terms, the Treasury is trying to judge the balance of three effects. First, if government spending exceeds taxation, the state provides a net positive injection to the economy in the current period but, if the net injection is shrinking year-by-year, it negatively affects the rate of real GDP growth. Second, if the scale and scope of government net injections are out of kilter with those of the private economy, it may be a negative influence on the development of the economy in the long run. This is known as ‘crowding out’. Third, if state spending exceeds the tax take, the Treasury has to borrow the difference. This affects a range of financial elements in the short run and the freedom to act of governments and citizens in the long term. Broadly, today’s borrowing is tomorrow’s taxation.
The micro context: specific measures in the budget, such as decisions on excise duties for alcohol and fuels through to decisions to spend on major transport infrastructure, affects the incentives for businesses to invest and households to spend or save. In any budget, there are measures that help and others that hinder growth prospects and these often affect various communities and sectors differently. The question is whether, in net terms, the Budget supports the incentives of individual businesses and households to invest for their future by boosting immediate activity.
Obviously, these three elements are interrelated but it is often useful to judge a Budget on each levels. So, what should Dorset look for this week?
First, remember, whatever the headline debate about ‘spending within means’, ‘paying down debt’, boosting growth and creating jobs, the government is and will still be big. How and where it spends our money matters: not least in terms of local procurement. The balance between capital and current spending, whether it is on infrastructure and other productive facilities for the long run or on current items, such as benefits, wages, immediate goods and services, that boost current activity. Will Dorset get more ‘value’ for the money it sends to Westminster after this Budget?
Second, consider how any tax measures will affect your spending and prospects. Changes to VAT, basic tax allowances, benefit systems can affect personal incentives dramatically. For what it’s worth, my own view is that the parlous state of UK demand and productivity, (driving a lack of business confidence to invest and hire), means that I would favour an increase in the VAT threshold for small businesses to £100,000 and a reduction in the rate to 15%. Over time, this would probably raise Dorset/UK growth rates sufficiently to pay for itself compared with staying stuck in today’s economic doldrums. But, don’t hold your breath.
Part of me says, “Please, do nothing at all”. Treasury fiddles with things so much without ever assessing whether previous policies were, in fact, good or bad for the economy. Another part of me says, “Please, do no harm.” We need action to stimulate confidence and growth but keep it simple and focused on incentives that everyone can understand.
Anyway, enjoy the debate, be sceptical, and let’s assess what it might mean for Dorset’s prospects next time.
Professor Nigel Jump, 16th March 2013
