Chancellor of the Exchequer George Osborne tinkered busily with taxes and public spending in his new budget, as tradition requires, but left the overall fiscal and monetary policy unchanged. This is a pity.
The British economy is flailing. A new forecast by the Office of Budget Responsibility says that Britain will avoid a triple-dip recession this year — barely. Expected growth in gross domestic product is just 0.6 percent, down from the previous forecast of 1.2 percent. The budget office predicts only a feeble recovery in 2014 and 2015 and says that unemployment won’t fall to less than 7 percent until 2017.
“It is taking longer than anyone hoped,” Osborne said, “but we must hold to the right track.”
This isn’t the right track. Osborne is correct, of course, that turmoil in the euro area has hammered British exports and that his program of fiscal austerity isn’t to blame for the recession. He’s also right that the government must get a grip on longer-term public borrowing. Nonetheless, too-tight fiscal policy here and now is making things worse. With interest rates very low, a significantly expanded program of public investment would have made sense, even at the cost of a bigger short-term deficit.
Osborne plans to increase the government’s capital spending, but wants to pay for this mainly by squeezing current spending. That switch is fine, as far as it goes. Unfortunately, it caps the rise in capital spending far too severely. The budget announced an increase in infrastructure allocations of just 3 billion pounds a year starting in 2015.
In a calculated grab for favorable headlines — another hallowed British budget tradition — Osborne announced a plan to subsidize and partially guarantee housing loans. Desirable as a housing-market recovery may be, that’s a dubious initiative at best. Government meddling in housing finance rarely ends well. Osborne also announced another cut in the tax on business profits — from 21 percent to 20 percent in 2015 (assuming his party is still in power).
Financial markets thought Osborne might change the government’s instructions to the Bank of England on monetary policy, perhaps signaling a more permissive attitude to inflation. He made the smallest gesture in that direction, by endorsing the central bank’s flexible interpretation of its mandate and telling it to be more explicit about the trade-off between growth and short-term inflation in explaining its monetary-policy decisions.
In the future, he said, the Bank’s mandate may be changed to include “forward guidance” on interest rates, of the kind the U.S. Federal Reserve now issues. A more thorough review of the monetary-policy rules will probably follow Mark Carney’s arrival as governor later this year. For now, though, the 2 percent inflation target is unchanged — and the pound strengthened on the news.
Osborne’s overall strategy remains as it was before: continued fiscal stringency allied to monetary easing courtesy of the Bank of England. In Britain’s depressed economy, with interest rates at zero and diminishing returns from quantitative easing, it’s hard for monetary policy to get much purchase. On the morning of the budget announcement, the Bank of England released the minutes of its meeting in March showing that its monetary policy committee voted 6-3 (with Mervyn King, the governor, on the losing side) against further easing on fears that the central bank’s credibility might be eroding.
Osborne’s right to worry about the public debt, but he has the balance wrong. Britain can borrow very cheaply and has its own currency, so it can’t default on its nominal obligations. That’s an advantage it should exploit. Fiscal policy should play a larger role, and this budget was a missed opportunity.
Bloomberg News (March 22)