Annual Policy Review 2015




  • Return to steady growth, strong and rising employment, and low inflation
  • Delivery of tax cuts through business rates for SMEs, corporation tax and the raised personal allowance

1More-to-doMore to do

  • Stimulate earnings growth to avoid aggravating a cost of living crisis
  • Ongoing efforts to find £25 billion worth of public spending cuts in a bid to reduce the structural deficit

1UnexpectedThe unexpected

  • IMF U-turns to revise upward UK growth forecasts
  • The Government’s Help-to-Buy scheme stoking fear of a housing bubble


  • An economic recovery half-done, but a policy argument won



With the election a matter of months away and policy business all but finished, George Osborne will have hoped that by now the trends in growth, jobs and pay figures would be enough to sell his long term economic plan to the public. And indeed he enjoys a huge lead in economic competence ratings. But the job is not done: instead of a fully healthy economy and closed deficit, the Chancellor will make a case for his economic competence based on the right decisions in a tough environment.

Unlike earlier stages of the Parliament, where international judgement seemed to be against him, in October the Chancellor was able to brandish IMF forecasts for UK economic growth at a healthy 3.2% (the Office of Budget Responsibility was slightly less bullish but in the Autumn Statement revealed it had a good outlook for 2014 and expected growth of 2-2.5% for the following five years).

The public also seems broadly supportive. An ICM poll found that public confidence of the Tories’ handling of the economy has lent them a 20 point lead on economic competence – the biggest gulf between the parties in the polls for three years.

In response, the Shadow Cabinet has trudged back to safe territory, accusing the Conservatives of relying on “one or two sets of figures” and railing that the cost of living has broken the link between the wealth of the nation and family finances. This battle for feelings, rather than headline figures, is still just about alive.

Yet for all the economic indicators that have fallen in Osborne’s favour – or have been dressed to do so – the UK economy is not out of the woods.

Inflation has dropped to 0.5%, its lowest level in 14 years. Triggered by plummeting oil prices and a supermarket price war, the trend is welcome relief to struggling households and fulfils the Office of Budget Responsibility earlier forecasts that earnings can now reliably out-pace costs. For Mr Osborne, the latest results are a chance to tout his much-promised ‘feel-good’ factor but beyond May, possible deflation and fears of week spending could yet derail his core argument.

Monetary policy remained in something of a grey area in 2014, with a strong independent Bank of England governor seeming to follow a political agenda which is much broader than the inflation target established in the Labour years. Mark Carney’s second set of forward guidance, issued in February, implied low interest rates for longer, even if unemployment came down at the same time as inflation. Decisions would instead be made taking into account spare capacity in the economy – thought to sit at around 1.5% of GDP.

It is certainly in the government’s electoral interests if mortgages stay cheap, even if that comes at the expense of a predictable or even comprehensible policy. One other effect, though, is a further surge in house prices, with the effect of making the housing ladder less accessible and prompting fears of a bubble. During the summer, the Chancellor handed the Bank new powers to cap high street mortgages, in the process exposing his help-to-buy policy to charges of stoking a housing bubble and overheating the recovery. Subsequent changes in stamp duty will lead to more stories of surging house prices, except for the very top of the market.

Cheap mortgages remain a political conundrum. Despite resistance from homeowners, a rise in the interest rate would signal a return to normality for the British economy. What’s more, unaffordable homes, particularly in the South East will continue to gift Labour the ability to point out the uneven effects of the recovery. However, a rise before the election is highly unlikely.

Overall, the structural problems in the British economy remain. While unemployment has remained low, it is at the cost of uninspiring productivity rates, meaning businesses may not grow as quickly as Treasury officials anticipated.

Ultimately, this will have a significant legacy, but in political terms the fact that the government’s economic strategy was so explicitly based around deficit reduction means that public spending will be the focus. On this, the government’s record is less than convincing. The deficit was again adjusted upwards in December for 2014/15 and 2015/16.

This leaves an awful lot more work to do. Mr Osborne’s victory, though, is that the job half done merely strengthens the likelihood of the Chancellor making exactly the same offer all over again.