This was not the radical reforming budget it had been billed as. But its heart was in the right place
“THIS is not a tax-raising budget. But nor can we afford a giveaway.” Thus George Osborne, the chancellor of the exchequer, drew the narrow parameters of his second budget on March 23rd. The broad sweep of the coalition government’s fiscal policy was set in Mr Osborne’s emergency budget last June, and in October’s four-year public-spending review. His task then was to fashion a deficit-reduction plan of tax increases and spending cuts to reassure bond markets of Britain’s creditworthiness. This time the chancellor was restricted to finding small pockets of extra revenue to finance modest but eye-catching tax breaks or subsidies.
At least he did not come back for more money from taxpayers and spending departments. Nine months in, the plan to eliminate the structural deficit during this parliament is broadly on track. Public-sector net borrowing will be ??146 billion ($237 billion) or 9.9% of GDP this financial year, a few billion less than the Treasury estimated in June. The deficit in 2011-12 and beyond will be a shade higher as a share of GDP than on previous forecasts, but not much.
This higher path reflects a slower pace of economic recovery rather than any let-up in the chancellor’s zeal for fiscal austerity. The Office for Budget Responsibility (OBR), the fiscal watchdog set up by Mr Osborne last year, has revised its forecast for this year’s GDP growth to 1.7% from 2.1% (the forecast for 2012 was nudged down to 2.5%). That change reflects the momentum lost in the 0.6% fall in GDP in the final quarter of 2010. The OBR reckons some of the drop in output will have been recovered during a sprightly first quarter in 2011 (it forecasts a 0.8% increase), though it has not revised up GDP growth in subsequent quarters. The OBR judges that the chancellor will meet his self-imposed fiscal targets.
With the big-picture stuff in place, Mr Osborne could administer a few small balms to the economy’s sorest spots. The costliest measure—and the one designed to capture the headlines—was the suspension of planned real-term increases in fuel duties for the life of the current parliament, together with an immediate one-penny per litre cut. That change will cost the Treasury ??1.9 billion in 2011-12, but will be more than paid for by an increased levy on North Sea oil producers, to capture the windfall gains from high crude prices. Mr Osborne justified this transfer from producers to consumers by noting that other oil-producing countries have tax systems that squeeze profits harder when oil prices are high. He said a sustained fall in the oil price below, say, $75 a barrel would prompt a reversal in the balance of taxation towards consumers.