The Budget barely scratches the surface of what’s required

George Osborne today made improving infrastructure one of the key planks of his strategy to compete in the “global race”. Any move in this direction is to be supported but the small print of the Budget, as so often, shows that his headline announcement today will barely scratch the surface of what the economy needs to get growing again.

George Osborne today made improving infrastructure one of the key planks of his strategy to compete in the “global race”.

Any move in this direction is to be supported but the small print of the Budget, as so often, shows that his headline announcement today will barely scratch the surface of what the economy needs to get growing again.

The crisis of growth in Britain is now acute. In just three months, the Office for Budget Responsibility has halved their estimate for growth this year. In December they thought it would be 1.2 per cent; now they say it will be just 0.6 per cent. Their quarterly forecast (Table 3.2) shows that one bit of bad news this quarter would push Britain into a triple dip. A far cry from their rosy estimate in June 2010 that growth this year would be 2.9 per cent.

The OBR think that fixed investment across the economy (Table 3.5) will rise by just 2.2 per cent this year. At the last Budget they said it would be 6.2 per cent. Despite this downgrading, the new infrastructure spending – worth £3 billion per year – will only come into force from 2015/16 by which point they predict growth should be back up to 2.3 per cent and investment at 8.1 per cent.

Last year, the IMF estimated that multipliers on infrastructure spending could be as high as 1.7 implying that £3 billion of investment could boost GDP by up to 0.3 per cent per year. Instead, government investment (known as “gross fixed capital formation”) will actually fall from 2.1 per cent in 2011-12 to 1.9 per cent in 2013-14 before settling at 1.8 per cent by 2017-18 (Table 4.14) despite the new announcement. This is better than was planned under Labour but the government has not done nearly enough to reverse one of the most catastrophic forms of spending cut.

To stimulate inward investment, the government has bet everything on cutting corporation tax once again—this time to 20 per cent by 2015. This is the umpteenth time that Osborne has tried this trick and it is patently failing. ONS figures published last month showed that foreign direct investment inflows to the UK fell from 2010 to 2011 and are barely one-third of what they were before the crash. This fall was true in every region aside from Europe and Australia.

We’ll have to wait until the spending review in June to find out how the £3 billion will actually be spent but there were a couple of hints today. Osborne appears to have all but abandoned plans to create a green economy by announcing a “generous new tax regime” for early investment in shale gas. It is clearly better to burn gas extracted in the UK than to import it but the Committee on Climate Change has said that “Extensive use of unabated gas-fired capacity (i.e. without carbon capture and storage technology (CCS)) in 2030 and beyond would be incompatible with meeting legislated carbon budgets”.

Supporters of shale may point to Osborne’s announcement to take forward two carbon capture and storage projects. The only problem is that their £1 billion ambition is a fraction of what was planned under the last government and the UK missed out on €600 million of funding last year from the European Union because Osborne refused to provide match funding.

In relation to housing, meanwhile, Osborne has focused all his energy supporting home buying rather than house building. It is expected that just 15,000 additional houses will be built—but most wont start until 2015.

The chancellor showed today that he understands the arguments for increasing investment spending but by waiting until 2015 has ensured that it will do nothing to get the economy moving in the short run.

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