Hamish McRae: How to separate the style from the substance in today's Budget

Economics: Look at it through the eyes of business. Are they more confident or less?


We are two years in. Two years of what in the jargon is known as de-leveraging and what in plain English means paying back our debts. The Budget today will really be a report card on how we are doing: how well the economy is performing because it is obviously easier to pay back debt if you have more resources to do it with; and how well the Government is doing in holding down its own costs and raising additional tax revenues. The rest is politics. Of course, the politics matter because the Coalition has to maintain support for its actions. But the economics matter more.

So how should we calibrate all the stuff that is going to be thrown at us? As far as the economy is concerned we will, I expect, be told that the UK is likely to escape recession, and that the first three months of this year will show some growth. We will get a forecast for growth for this year and a further pick-up next. These come from the independent Office for Budget Responsibility, and it is no criticism of the excellent people running it (its head, Robert Chote, years ago worked for The Independent) to say that all its forecasts should be read with scepticism. It is hard to get forecasts right, and the OBR has been somewhat over-optimistic; the raw data is subject to such large revisions, often several years later, that we are not really sure where we are now. Thus, the UK emerged from recession three months earlier than originally estimated but we did not know that until last November.

This has political implications. It was embarrassing for Gordon Brown to have to admit that Britain was coming out of recession more slowly than the main European countries – except that this was not true, for we came out at the same time. Apply that to suggestions that Britain grew more slowly than the eurozone last year. That probably is not true either.

So look at the OBR's forecasts, look in particular at any guidance on its intuitive feeling for what is happening... and then look at some hard numbers, such as how much tax is coming in or how many jobs are being created, and apply common sense to the mix. My guess is that growth is better than reported but not great.

On the second big issue – government finances – anything close to a deficit of £120bn this financial year will be encouraging, particularly if this slightly better-than-expected outcome is backed by better tax revenues. Higher receipts mean more economic activity. But, to put the length of the journey in perspective, we started with a deficit of £160bn and need to get to, say, £20bn, so we have done £40bn but have £100bn to go. That is huge.

Remember that £100bn. Getting an extra £1bn from pop stars who avoid stamp duty by registering their homes abroad may make good politics but it alters the big numbers not one whit. All this agonising about the 50p top tax rate is politics, too, for its impact on revenues is tiny and may well be negative. What matters are the big numbers for income tax (£160bn), national insurance (£100bn) and VAT (another £100bn). And, if we get growth, those revenues will rise and we will keep paying down the debt on schedule. If we don't, things get tricky.

That leads to the final point: how do we get growth? The test of a budget, or rather the test of government policy more generally, is whether it is conducive to growth or whether it puts barriers in the way. There is no magic wand. So perhaps the most useful way of reading the Budget will be through the eyes of the business communities. Do they welcome it? What do they think of the small business loan scheme? Are they more confident or less? Commerce has no monopoly of wisdom and has to work within the structure of any society. But, right now, its response matters quite a lot.

Beware bulls bearing bonds

There is one other feature of the world economy that is beyond our control: what is happening to bond markets. It is relevant to Britain but an issue facing the entire developed world. Long bond yields were until recently at historic lows: the UK, US and German governments could borrow for 30 years at less than 2 per cent. That is the context of suggestions that the UK should issue 100-year debt, or even undated debt – stuff that goes on forever.

But the mood has shifted. Long-term rates have been edging up. There are two broad explanations. One, the good reason, is that growth is picking up so there is more demand from non-government borrowers, and confidence is rising so there is less need of "safe havens". The bad reason is investors are scared that all the money central banks are printing willgenerate inflation. Either way, bond holders should beware. We have had just over 30 years of falling long bond yields. Previous bond bull markets have typically lasted 30 years, so historically we are ripe for a turning point. So beware any 100-year bonds – a signal the bear market is about to begin. Great for the taxpayer, dreadful for the investor.


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