Leader: This was an ordinary Budget for extraordinary times

The Chancellor's "fiscally neutral" Budget will do little to revive Britain's anaemic economy.

Future historians will record with amusement that, in his first "emergency" Budget in June 2010, George Osborne promised a "steady and sustained economic recovery, with low inflation and falling unemployment". Since then, the Chancellor has failed on every count. Growth in 2011 was just 0.8 per cent - one of the worst performances in the European Union - and is forecast to be the same this year. As a result, Britain, unlike the United States, Canada and Germany, has yet to recover all of the lost output from the recession. Indeed, GDP remains a remarkable 3.8 per cent below its 2008 peak. We remain as a nation much poorer than when we entered recession in 2009 and the road ahead is long and gloomy. Meanwhile, unemployment, which stands at 2.7 million, continues its relentless march towards three million. Mr Osborne's promise that private-sector job creation would "far outweigh" the job losses in the public sector (his fabled expansionary fiscal contraction) has not been fulfilled. In the past year, 270,000 public-sector posts have been cut but just 226,000 private-sector posts have been created. An anaemic economy and a stagnant labour market have left Britain's cherished AAA credit rating - which Mr Osborne adopted as the metric of success - once more under threat. The Chancellor is failing on his own terms.

Mr Osborne's third Budget was intended to rectify all of these problems, but his rhetoric about bold "reform" could not disguise the essential conservatism of his response. This was an ordinary Budget for extraordinary times. To improve the UK's growth and employment prospects after the economy has already fallen back into recession, he needed either to engage in fiscal stimulus or to restructure the tax system boldly in a pro-growth direction. He did neither.

By delivering another "fiscally neutral" Budget, banking any savings to reassure the markets, the Chancellor failed to reduce the pace of austerity and his tax changes, though of considerable political significance, amounted to low-level tinkering. The accelerated increase in the personal allowance, which will rise from £8,105 to £9,205 in April 2013, was neither as reforming nor as progressive as the coalition would have us believe. The policy does nothing to help the third of the adult population too poor to pay income tax and, partly for this reason, it is an ineffective fiscal stimulus. The Office for Budget Responsibility has calculated that higher infrastructure spending, increased spending on benefits or a cut in VAT would all do more to boost the economy in the short term. Economic logic tells us that tax cuts targeted on low earners, who are more likely to spend any windfall rather than save it, are the most effective stimulus. Yet, contrary to the Liberal Democrats' claims, the biggest winners from the rise in the personal allowance are not the poor but the rich.

Research by the Institute for Fiscal Studies shows that those in the second-richest decile gain the most in cash terms, followed by the richest tenth, who gain marginally less because of the gradual removal of the personal allowance after £100,000 (an inspired piece of stealth redistribution by the former chancellor Alistair Darling). It is middle earners who gain the most as a percentage of income, those at the bottom gaining by far less. The government has adopted a policy that, at a cost of £3.3bn a year, does little to advance either economic growth or social justice.

The biggest tax cut of all, however, was reserved not for low- or middle-income earners but for the top 1 per cent. Mr Osborne's regressive decision to cut the top rate of tax from 50p to 45p, with a further reduction to 40p scheduled to follow, signalled definitively that we're not "all in this together".

Until recently, both the Conservatives and the Liberal Democrats appeared to recognise that it would be unacceptable to abolish the top rate - an important symbol of "solidarity" - at a time of austerity. In January this year, defending the policy, David Cameron remarked that "when you're taking the country through difficult times and difficult decisions, you've got to take the country with you. That means permanently trying to make the argument that what you're doing is fair and seen to be fair." More strikingly, the Chief Secretary to the Treasury, Danny Alexander, declared that anyone advocating a cut in the 50p income-tax rate was "living in cloud-cuckoo land". Only in return for a "mansion tax", we were told, would the Liberal Democrats even consider agreeing to the abolition of the top tax rate.

Yet the 50p rate has gone and a mansion tax is no closer to becoming reality. Instead, the Chancellor announced a rise in stamp duty from 5 to 7 per cent on properties worth more than £2m, a welcome move, but one that does not compensate for the abolition of the top rate. True, the Treasury may have found that the 50p band is raising significantly less revenue than expected. But this is an argument for reducing tax avoidance, not for cutting taxes for the highest earners at the present time.

Mr Osborne was right to act to close a few tax loopholes, such as the one allowing individuals to put their homes into companies to avoid stamp duty, but he has missed an opportunity to shift the burden of taxation away from earned income and towards unearned wealth. As the New Statesman has long argued, property taxes are fair, easy to collect and economically beneficial. By shifting investment away from housing and into wealth-creating industries, they boost growth and, consequently, are rated as less economically harmful than taxes on consumption, income and corporations. Some of the more enlightened figures on the Conservative back benches recognise as much and yet, for fear of alienating his party's Home Counties base, Mr Cameron has vetoed any move towards a mansion tax.

The Prime Minister and the Chancellor are fond of describing themselves as "fiscal conservatives" but "monetary activists". Indeed, interest rates have remained at a record low of 0.5 per cent for three years and the Bank of England's quantitative easing programme now stands at £325bn. Though policy is formally determined by the independent Bank, Mr Osborne has consistently signalled his approval of its monetary expansionism. And with good reason. By artificially suppressing bond yields, the Bank's QE programme has allowed the Chancellor to boast that his austerity programme is responsible for the UK's "safe haven" status. But at a time when the economy is suffering from a crisis of aggregate demand, low interest rates alone are not enough to stimulate investment. As John Maynard Keynes once observed, relying on monetary policy only to do the heavy lifting at a time of recession is like "pushing on a string".

In our recent "Plan B" special issue, the Nobel economics laureate Christopher Pissarides, the development economist Jeffrey Sachs and Robert Skidelsky, biographer of Keynes, called for measures including a VAT cut, a National Investment Bank and the suspension of the immigration cap to revive growth. A properly "reforming" Budget would have included some or all of these policies. For reasons that are essentially political, however, Mr Osborne has rejected one final opportunity to change course. By falsely claiming that borrowing for growth would "bankrupt" the British economy even as he borrowed £147bn more than expected, the Chancellor tied his own hands long ago. And the country will pay in the form of higher unemployment and ever greater inequality.

This article first appeared in the 26 March 2012 issue of the New Statesman, Mission impossible