Big-Ben

The political rationale behind Budget 2013

When George Osborne gets to his feet on Wednesday lunchtime to deliver his fourth budget to parliament, he will effectively be firing the starting gun on the general election campaign.

Nobody is expecting much in the way of new economic news. He only delivered his Autumn Statement on 5th December and not much has changed since then. Moreover on that occasion the Office of Budget Responsibility not only massively downgraded its forecast to bring it into line with the consensus view, and changed its underlying methodology, but also confirmed that it was no longer expecting the government to meet its target of having the stock of debt falling by 2015-16. That was a big realignment – and a major contributory factor to Moody’s downgrading its UK credit rating. After such a big change less than four months ago, they are unlikely this week to make more than a few tweaks here and there in line with the latest data.

Having got all of that out of the way, the Conservative leadership can now focus on how to exploit the economic situation they find themselves in to their best political advantage over the next two years. Their optimal path to doing that is now becoming clear.

There seems little doubt that the economy is now poised to start growing again. There are of course still some wobbles to be sorted out; manufacturing is now (finally) feeling the pain from lesser demand from EU trading partners, wages are expected to remain stagnant for a while, and if the pound continues to slide, the higher import inflation will further erode consumer confidence. But notwithstanding all of this, something seems to have changed in the ether, witnessed by the ebullience in the stock market and a strengthening labour market.

Businesses say anecdotally that whilst it isn’t anything like it used to be, there is a willingness to make progress on key deals in a way that there hasn’t been since the recession first hit. Why? Quite simply, it’s Keynes’ animal spirits. Some of us human animals are beginning to feel we’ve done with licking our wounds and are preparing to go out hunting again. When the euro didn’t break up in mid-2012, despite screaming headlines to the contrary, people started looking round for the next crisis but couldn’t find anything comparable. From that moment, the only way was up.

From Mr Osborne’s point of view, this means we are back on Plan A, albeit a year or two behind schedule. OK so they won’t have managed to eliminate the structural deficit in a parliament (indeed if they hadn’t repealed Labour’s Fiscal Sustainability Act that proposed only halving the deficit, they might well be facing prosecution under it) but the basic story is as originally planned in June 2010. They’ll be going to the electorate in 2015 with the recession over and the glorious uplands of greater prosperity, if not quite yet in the pockets of middle England, at least palpably nearer.

The question that is not yet answered is come 2015, will the electorate believe things are slowly improving because of the government or despite them? And herein lies the clue to the 2013 Budget. It is palpably in the government’s interests to make some large economic policy announcements right now in order to draw a clear line in the sand that they can point back to later as proof that it was their actions that got things back on track.

Put into that category altering the mandate of the Bank of England, attracting Sovereign Wealth Funds to invest in Britain, and further headline-grabbing tax and welfare reform. Regardless of whether or not any of this will have any actual effect, from Wednesday onwards, we can take the economic situation as given: it’s slowly and painstakingly improving. The only real question now is: who reaps the political reward?

Written By

Kitty Ussher