The 2014 Budget – as “good as it gets” for now
20 March 2014
2014 may be “as good as it gets” for the growth of the British economy, according to the latest OBR forecasts released in yesterday’s Budget. GDP growth is projected to be 2.7% this year, but is then expected to be around 2.5% over the next four years.
This subdued growth outlook is one reason why the Chancellor had little room for manoeuvre in his Budget, despite the fact that the economy is now picking up and unemployment is falling. This was a Budget shaped by the “New Normal” low-growth recovery we have been experiencing since the financial crisis.
Overall, the Budget was roughly neutral. Additional economies in government spending were used to fund the biggest tax giveaway – a £500 rise in the annual personal tax allowance. In other areas – business taxes, incentives for savers, energy taxes and excise duties – there were similar swings and roundabouts. Extra revenue from a clampdown on tax avoidance will help to pay for additional investment incentives and contribute to keeping down energy prices for business.
On the savings front, there were some helpful incentives announced. But these are expected to be offset by higher tax payments from pensioners who are now able to draw down their pensions more quickly without paying a penal rate of tax.
These are all useful reforms, but they will not significantly change the dials on the outlook for the growth in the UK economy. This partly reflects the fact that many of the factors shaping the subdued economic outlook are international forces outside the Chancellor’s control.
Our main export markets in Europe are only gradually recovering from the impact of the euro crisis. And the relatively high energy, food and commodity prices which are squeezing consumers reflect strong global demand relative to supply, which is likely to persist.
Another issue which could have an impact on the growth outlook is the prospect of rising interest rates, which is now being discussed more openly by the Bank of England. Even a gradual rise in rates could have some dampening impact on growth as the economy adjusts.
The Chancellor still has to grapple with a large deficit, which will only fall slightly below £100bn in the coming tax year. But when the deficit is back under control, there are ways in which a more radical tax-reforming Chancellor could improve the prospects for the UK economy.
For example, tax rates could be brought down by limiting the reliefs and allowances available. The taxation on low earners, savers and businesses could be eased by switching the tax burden onto expenditure and environmental levies.
But these changes would need much more significant reforms to the tax system than the Chancellor was willing to contemplate just ahead of next year’s election. We will have to wait until the next Parliament, or possibly the one after, for more radical tax reform. For now, this Budget was “as good as it gets”.