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A year ago, nobody – including Mr Osborne – expected the 2014 Budget to be set against such a relatively benign economic background for the UK. In March 2013 the talk was of a triple dip recession, as the country had just recorded a contraction of 0.3% in the final quarter of 2012. Inflation, as measured by the February 2013 Consumer Prices Index (CPI), was running at 2.8% and had been above its 2% target since December 2009. In Europe the latest round of the Eurozone crisis was taking place, with Cyprus becoming the fifth EU member to seek a bailout. All in all, it was not a pleasant economic backdrop against which to present another austerity-as-she-goes Budget that promised a further £100bn+ government deficit for the coming year.
March 2014 presents a very different picture. The triple dip recession never appeared, much to the Chancellor’s relief (and Ed Ball’s frustration). By summer 2013 the Office for National Statistics had even revised away 2012’s double dip recession by adding 0. 1% to an earlier estimate of 2012 first quarter growth. Across 2013 as a whole, the UK grew by 1.8%, more than three times as fast as the Office for Budget Responsibility (OBR) had forecast in its Budget 2013 “Economic and Fiscal Outlook”. The OBR is now projecting growth of 2.7%, while the Bank of England has pencilled in 3.4%, well above consensus forecasts.
Inflation has also fallen: the latest CPI figure was 1.9%. The Bank of England now expects inflation to be at or below 2% for the next two years, which could mean that at long last earnings growth starts to outpace price increases. Low inflation will also make it easier for the Bank to hold off from raising interest rates. As for the Eurozone, no fresh major problems have emerged since Cyprus, and Ireland has become the first country to leave the bailout procedure. However, it would be a brave person who claims to be certain no further Eurozone issues will emerge – the Greek tragedy could still be due a re-run and the ramifications of the Crimean situation could cause Cyprus more problems with its Russian investors.
From Mr Osborne’s viewpoint, all the good economic news created something of a dilemma. The next General Election is now less than fourteen months away and the pollsters say that the Conservatives are most trusted on managing the economy, even though they are behind Labour in the main polls. Mr Osborne could not therefore risk a “job done” stance, despite the favourable numbers. He therefore laced the good news with a heavy sprinkling of ‘we-are-not-out-of-the-woods-yet” warnings.
There is certainly truth in the notion that work remains to be done. The OBR estimates that net government borrowing in 2013/14 was about £108bn, which is close to £50bn more than forecast in 2010. The OBR calculates that by 2018/19 total net government debt will be nearly £1.55trn (£1,550bn), a level that the well-respected Institute for Fiscal Studies (IFS) “will constrain government policy for many years to come.”
Those borrowing numbers assume that the government’s austerity measures run their course. So far most of these have been in the form of tax increases: there are still many spending cuts to come. Quite how big these will be was highlighted by the IFS, which noted that “public service spending as a share of national income in 2018/19 will be back around the level it was in the late 1990s …and it is far from certain that the current or a future government will have the political will to see state provision of services reduced to this extent.”
Alongside all these constraints the Chancellor also had to bear in mind that this was his last full Budget before the Election. Next year’s springtime offering will be a simple procedural affair because Parliament is set to shut up shop before the end of March, leaving no time for detailed consideration of the Finance Bill. The real Budget of 2015 will, as in 2010, be the Budget announced after the Election.
For this year’s Budget, Mr Osborne’s fifth, the most interesting points to (re-)emerge were:
