UK Budget a missed opportunity says LBS economist

Expert says Budget was a chance to align fiscal policy with growth aims

The UK Budget announced today was a missed opportunity, a London Business School economist has claimed.

Writing on Forbes, Linda Yueh, Adjunct Professor of Economics, London Business School, said that the Budget seemed to be a missed opportunity to align fiscal policy with growth aims.

Dr Yueh says: “With record low borrowing costs, the UK Government arguably has some scope to invest and reverse the dramatic declines in public infrastructure spending that was slashed during the 2008 banking crisis to balance the books. 

“Public investment is projected to fall to just 1.4% of GDP in 2020, which is very low historically and comparatively to other nations. More public spending on housing or transport or broadband, can make private investment more efficient. The OECD has recently called for more of this type of investment, arguing it can generate growth and even reduce UK debt.”

The Government has made economic growth a priority, and put the National Infrastructure Commission at the forefront of its push to raise output. With the global economy so weak, domestic growth drivers are more important than ever.

“But”, says Yueh, “the nature of fiscal rules, and a looming referendum on the UK’s membership in the EU, tied the hands of the Chancellor. 

“The latter may be a political constraint that’s hard to avoid, but the former is self-imposed.”

The Government, she says, will in any case miss one such self-imposed fiscal rule: that debt will fall as a share of GDP each year of the Parliament to 2020. 

“The reason for the miss is technical”, Yueh explains. “Because inflation is so low, nominal GDP (the size of national output in cash terms) is smaller than expected. Plus, the real growth rate has been downgraded by a chunky 0.4 percentage points to 2%, down from last November’s forecast of 2.4%. 

“That means that even though the total debt owed by the Government is smaller than the year before, the debt-to-GDP ratio has risen to 83.7% (from 83.3% for 2014-15 instead, and violates the fiscal rule.”

While there has been no violent reaction in the market, the impact on credibility remains to be seen.

One thing the markets will not have missed was a cautious Budget. 
There were further tax cuts for corporations, including reducing the top rate to 17% and eliminating business rates for SMEs, which in effect re-distribute the tax burden from smaller to bigger firms. 

Each of these announcements was couched in a “fiscally neutral” manner, so any additional spending is linked to a cut. Even the new sugar tax was fiscally neutral.