It is against an unpropitious background that the Chancellor will present his Budget in one week’s time. Politically, his party is riven with insecurity and the spectre of Ukip is looming large. Economically, Britain is on the brink of a triple-dip recession, the triple-A credit rating is lost, and even optimists predict only slight improvements to come. The latest warnings about increasing numbers of children slipping below the poverty line only add to the pressure. Yet George Osborne has exceedingly limited room for manoeuvre.
Britain’s economic problems are far from simple. Turmoil in the eurozone is a very real drag on growth. The banking sector is still dysfunctional – pulled one way by the requirement to take fewer risks, and the other by demands to increase lending. Meanwhile, the rise of China et al is forcing a radical re-think of our global role. And, after the bursting of one of the largest credit bubbles in history, there is no alternative but a period of retrenchment. All of which adds up to a conundrum to which neither the debt-funded Keynesianism of the left nor the tax-cutting fanaticism of the right is any answer.
Next week, the Chancellor will want to unveil some sweeteners easing the burden on long-suffering households – increasing the income tax threshold to £10,000, say, or cancelling impending increases in petrol duty. Both moves would be welcome. But Mr Osborne’s first priority must be to avoid the debacle of U-turns that took such a toll on his reputation last year. He must also resist the temptation to try to see off his critics with grand gestures. The Chancellor does not have growth within his gift, and he would do well not to imply otherwise.
That is not to say there is nothing Mr Osborne can do. Top of the list is infrastructure. The Coalition talks warmly of investment plans, but only a tiny fraction of projects have gone ahead. Pro-posals to encourage private money into public programmes are also making slow progress. And attempts to boost our house-building have had little impact. The Chancellor must use the Budget to turbo-charge such efforts, particularly as regards the bottlenecks in the housing sector. School-building slated for after 2015 should also be brought forward, and planning reforms must be expedited.
Mr Osborne is right to stick to his austerity plans. He is right, too, to have let them flex in response to Britain’s sluggish growth. But he must do more to ensure that public spending is focused on the most economically productive areas. That means putting an end to universal pensioner benefits. It also means looking again at the ring fences around some of Whitehall’s more inefficient budgets. For all the Prime Minister’s protestations that education, foreign aid and the NHS should be sacrosanct, there can be no justification for further cuts to welfare, say, while such distortions remain.
The Chancellor is widely expected to use the Budget to adjust the remit of the Bank of England, ahead of the new Governor’s arrival in July. There is certainly room for more innovation from Threadneedle Street. But monetary policy is no panacea. Indeed, Mr Osborne should pay as much attention to the troubles of the retail banking sector.
Lending is still sclerotic, particularly to smaller companies, putting a brake on growth and scuppering judicious efforts to boost exports to fast-growing, non-EU markets. The so-called “Funding for Lending” scheme set up to crack the problem has proved largely ineffective, though. Despite a slight rise in mortgages, business lending is still alarmingly low. It is time for a shake-up, then. Extending the initiative and setting a target for company loans are both decent options.
Tweaks to arcane loan strategies and guarantees for house-builders may lack the wow-factor of lavish spending pledges or swingeing tax cuts. But a Chancellor navigating the narrowest of courses would be wise to tread carefully.