Step back from the detail of Chancellor George Osborne’s Budget today and ask yourself: Does this Budget help the economy to move to a sustained recovery?
Remember we have an economy which is largely recovering on the back of household demand, which is built on shaky foundations: a falling savings ratio, higher borrowing when household debt is still exceptionally high in historical terms and real incomes that continue to fall. Investment is beginning to recover but is exceptionally weak. Net trade too is even weaker in the UK, a little stronger in Scotland.
So what has the chancellor done to ensure a more balanced and sustainable recovery?
On the positive side he has doubled and extended the Annual Investment Allowance estimated to cost £2 billion, which is a significant measure. This should help investment and mirrors what we argued for in the latest Economic Commentary last week. There are measures to help cut production costs such as the £7 billion package to reduce energy costs. These should help competitiveness and may improve export performance and so boost net exports.
But what was the centre piece or show piece measure introduced in this Budget?
A major boost to savings!
Yes, significant measures on ISAs, pension annuities and so on designed to encourage savings. Now think about the economics here: a rise in savings means lower household spending and therefore a reduction in demand in the economy. This at the same time as the Chancellor feels the need to continue his austerity programme further driving demand from the economy.
We do need measures to boost productivity, to improve the supply side. But in the here-and-now it is still demand that is key.
The Chancellor’s economics beggars belief.