Just one thing: a £50bn stimulus

The Social Market Foundation tells George Osborne what it wants to hear in the 2012 Budget.

The Social Market Foundation tells George Osborne what it wants to hear in the 2012 Budget.

If George Osborne does one thing, he should give the country a much-needed £50bn stimulus over the next four years, while sticking to the existing deficit reduction plan.

The pre-budget wrangling continues. As politicians and commentators obsess over the varying impact of scrapping the 50p tax rate, raising the personal allowance, or managing the child benefit conundrum, the real context of this budget is the UK's persistent lack of growth.

Last week's outlook downgrade by ratings agency Fitch didn't tell us anything we don't already know about the outlook for UK economy, as growth falters, unemployment grows and the Eurozone crisis rumbles on. But while the dangers of low growth are well rehearsed, the perils of looking weak by deviating from the deficit reduction plan are uppermost in the Chancellor's mind. So, to paraphrase the BBC's Paul Mason, the Budget is looking more and more like it will be an exercise in rearranging the deck chairs on the Titanic when it should be a real plan for growth.

But a very large fiscal stimulus can be achieved within the existing deficit reduction plan. And what's more, the deteriorating outlook for the government's finances gives Mr Osborne the perfect opportunity to act. According to last November's OBR analysis, at least £15bn of additional annual cuts or tax rises will have to be made by 2017. Rather than wait until then, the Chancellor should make the necessary cuts and tax rises now by scrapping policies known to have a low or negative impact on economic output.

The money saved from axing these measures should then be recycled into growth enhancing projects like infrastructure investment, which would boost economic output by around £10bn in each of the next three years, without wavering on the deficit reduction plan.

And the catch? Well the low-growth measures Osborne should target will not be politically popular. From scrapping the winter fuel allowance to capping ISA holdings at £15,000, Mr Osborne would be slaying a few sacred cows. But these savings are unavoidable in the coming years, and waiting to set out those cuts on the eve of a general election is hardly going to make the government more popular. The benefits of acting now, by contrast, could be huge. With a £50bn stimulus under its belt, the economy might well be on the road to recovery by then.

Ian Mulheirn is the director of the Social Market Foundation

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Ian Mulheirn is the director of the Social Market Foundation.