Recovery takes time. But, with a bit of luck, we could be back on the right track

The first question is whether the tweaks in the Budget are likely to boost growth

Share
Related Topics

We are stuck.

The deficit is not coming down and it will be extremely hard to get it down until growth picks up. So what do you do? The answer is three things. You squeeze down current public spending a bit and use the money to try to lift the spirits of the business community in the hope it will keep hiring. You try to unlock the housing market. And you nudge the Bank of England, under its new governor, to find ways of pumping yet more money into the system.

The big fiscal story is shown in the graph. In its first couple of years the coalition did make a start on cutting the deficit, getting it down to just under 8 per cent of GDP. This financial year – the one that ends in two weeks’ time – it has made no further progress. The coming year, the one highlighted, will be pretty much the same again. So the central plan of the Coalition, that each year the deficit would come down just a bit more, is blown out of the water. You can have a debate as to the reasons why – is it policy failure, a consequence of the eurozone disaster or plain bad luck? – but you cannot ignore the harsh numbers. As a result it will take even longer to start cutting the national debt and the peak debt will be even higher than seemed likely even three months ago. There has to be growth.

So the first question is whether the tweaks in the Budget are likely to boost growth. There is no overall shift in fiscal stance, so the issue is whether the shuffle of the pack will help. The good news is that the initial reaction of the business community is unambiguously positive, which makes for a change, and it is hard to see any big negatives. The change to the National Insurance regime will be of material help to small businesses. But companies will not suddenly go out and hire people because ofit. It cannot do any harm but let’s wait and see whether it has a material impact. But taken with all the other stuff for business, it is a positive signal, and signals do matter.

Unlocking the housing market is also important. The Bank of England’s quantitative easing programme has helped put a floor under house prices but it has not increased the supply of mortgages to any material extent. There is a structural reason for this. At the peak of the boom roughly half of all mortgages came from foreign or fringe lenders. They have all gone, back to Iceland or wherever. Only the core lenders remain, and they don’t have funds to meet demand. So they ask for huge deposits.

What the government is doing is trying in some measure to replace that missing chunk of supply. It is novel, so it is hard to assess how important the changes will be in practice, but the government is certainly pushing at an open door.

We do need more homes and it would be very helpful to the economy as a whole to have more activity in the housing market. But when a few years hence we look back to this Budget, I suspect the thing it will be remembered for will be the changes made to the mandate of the monetary policy committee. It will not be as big a change as giving the Bank of England the authority to set interest rates in 1997, or the introduction of unconventional monetary policies, such as quantitative easing after the crash. But having the Bank, under Mark Carney, taking on a more active responsibility for promoting growth and allowing it to give forward guidance to the markets are interesting innovations. If the plan succeeds, this could, over time, have a real impact on growth.

Yes, over time. Things do take time. There is an inevitable frustration with economic policy, for the authorities pull the levers and then are surprised that nothing happens. You could argue that the Treasury and the Bank of England should have pulled the levers two years ago, not now. Once speed does pick up it will become self-sustaining. But it has been a long wait.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

KS1 Teacher

£95 - £150 per day: Randstad Education Birmingham: Key Stage 1 teacher require...

HR Business Partner - Essex - £39,000 plus benefits

£32000 - £39000 per annum + benefits + bonus: Ashdown Group: Generalist HR Man...

Trainee Recruitment Consultant

£18000 - £30000 per annum + uncapped: SThree: Do you feel like your sales role...

Foundation Primary Teacher

£100 - £140 per day: Randstad Education Birmingham: We are looking for Founda...

Day In a Page

Read Next
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties  

Poppy Appeal 2014: This is why I won't be wearing a red poppy this year

Lindsey German
 

Devolution for the North would be great if only Manchester didn’t rile the region’s other major cities so much

Chris Blackhurst
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?