Tomorrow’s Budget is George Osborne’s last opportunity to make a significant difference to growth before the election but we now know it’s one he’s not going to take. The Chancellor will announce an increase of £2.5bn in capital spending but rather than borrowing for growth, as Vince Cable, the Economist and Bloomberg have all recently urged him to, the move will be funded through greater cuts elsewhere.
Osborne told the cabinet this morning that all unprotected departments would have their budgets reduced by a further 1 per cent in 2013/14 and 2014/15. As a result, the effectiveness of the £2.5bn fund (itself a paltry amount) will be significantly reduced. Based on the OBR’s fiscal multipliers (those pesky things that Robert Chote recently reminded the Prime Minister of), the increase in capital spending will boost GDP by £2.5bn but the cut in current spending will reduce it by £1.5bn. The net result, according to TUC economist Duncan Weldon, is that output will be increased by just 0.06 per cent of GDP (£1bn). A plan for growth this is not.
Though Osborne will claim otherwise, alternatives were on offer. Cable called for the Chancellor to take advantage of Britain’s historically low bond yields and borrow £14bn (1 per cent of GDP) to invest in housebuilding. As he wrote in his New Statesman essay:
One obvious question is why capital investment cannot now be greatly expanded. Pessimists say that the central government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn higher than last year. Businesses are forward-thinking and react to a future pipe – line of activity, regardless of how “shovel ready” it may be: we have seen that in energy investment, where the major firms need certainty over decades.
The Economist recommended an additional £28bn of infrastructure investment, with at least half funded through higher borrowing. Bloomberg argued for a minimum stimulus of $21bn, again largely deficit-financed. But Osborne persisting in the delusion that “you can’t borrow more to borrow less” (in fact, as any Keynesian knows, you can) has once again chosen austerity over growth.