The Chancellor got the really bad news out of the way early on. The independent Office for Budget Responsibility forecasts revealed how badly the outlook has deteriorated in the last year. Growth for 2011 is now forecast to be just 0.9 per cent, and even lower in 2012 at 0.7 per cent. As the OBR points out, the 2012 estimate is well below the current average of independent forecasts and closer to the latest growth forecast for the eurozone. It shows how the single market links our economic fate to that of the eurozone, whether we like it or not.
The OBR do predict a recovery eventually, once inflation falls and demand and confidence pick up. But another less visible part of their forecast was their assessment that the potential output of the economy – the total volume of goods and services it is capable of producing – has been growing more slowly since the recession than previously thought, by just 1 per cent a year. The story seems to be that the credit crunch knocked rather more stuffing out of the economy than anyone expected.
Nor has the much-vaunted "rebalancing" of the economy taken place. Net trade remains negative; business investment depressed. It raises the question of whether the Government has been doing enough to sustain productivity growth, and whether the cuts it made to investment in its Spending Review were wise.
We now at least have some action on infrastructure. Vince Cable's plans now feature strongly and may be a powerful means of stimulating the economy as we can expect a multiplier effect from the expenditure. But there are a number of uncertainties. While some projects, such as housing, might arrive "shovel ready", others take time to get started. Also, the £5bn contribution from Government is being found from other current spending. The reduced current spending may in effect come from the low paid who tend to spend the money available to them. So if the infrastructure spending takes time to materialise, there is the risk of less growth in the short term. We should also remember that the other £20bn of expenditure, that the Government is effectively guaranteeing, amounts to just 10 per cent of the total infrastructure required by 2020.
The fiscal arithmetic is still tight. Low interest rates mean the cost of borrowing has been over £20bn lower than expected. But weak growth means the Government will need to borrow £100bn more over the next few years than expected, and the estimate of the size of the structural deficit has increased. The Chancellor has rolled forward the real freeze on spending in order to continue to meet his fiscal targets, but we cannot rule out the possibility of further cuts being required at a very politically sensitive time towards the end of this parliament.
So what has been done to boost growth? Help for developers and first-time buyers was welcome but limited in scale. The measures to help business with its costs, such as a further freeze on business rates and 100 per cent capital allowances, have been welcomed.
Credit easing might at least boost confidence, although the question here is whether lack of credit really is the biggest barrier to growth? Assuming it is additional, and not offset by measures elsewhere, such as the real cuts in public sector pay, the help to consumers through delayed rises in fuel duty might be significant.
Overall, this is a strange package. The Chancellor made the point that the appetite for long-term gilts is huge, and the Government can borrow at very low rates. This was seen as positive when justifying credit easing and help for first-time buyers. But why, then, did we see the financial engineering on infrastructure?
The forecasts confirm that the impact of these measures on growth in the short term is going to be modest. If we see continued turmoil in the eurozone, then bolder action will be needed in the Budget.
Vicky Pryce is Senior Managing Director – Economics at FTI Consulting