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Digesting the budget

At lunchtime on Wednesday (15 March), in a set piece of political theatre, Chancellor Jeremy Hunt unveiled those few remaining bits of the Spring Budget not already leaked to the media. 

These included reducing the amount of tax due on a pub pint of draught beer, although supermarkets still retain their tax advantage here. The duty on draught beer is actually paid by the brewers so we need to see how much of this they pass on to publicans. 

But this is small beer.

The Office for Budget Responsibility (OBR), which provides cover for the chancellor’s made-up fiscal rules, said that the outlook for the economy looking five years ahead was slightly less awful than it had predicted just four months earlier.

As you know, we got lucky with a mild winter, so energy prices fell by more than anticipated. The chancellor spent two-thirds of the £25bn a year improvement in the fiscal outlook, since November, on his budget measures.

The OBR never says whether a policy is a good idea, only whether the numbers add up. But the numbers are based around its forecasts – and these are no better (or worse) than others.

Thus, when the chancellor says that the OBR says that the UK will avoid recession, this is largely semantics and should not be taken as gospel. 

What is less spoken about is that two completely different forecasts are used to guide policy makers.

The OBR is used to set fiscal policy (taxing and spending) while the Bank of England makes its own forecasts to set monetary policy. These views can often be quite different. 

The OBR’s model is partly based on market expectations for interest rates, and these are particularly volatile at present.

For example, their latest forecast was made before the collapse of Silicon Valley Bank and the loss of confidence in Credit Suisse which may yet have serious implications for growth and interest rates.

The Budget itself was full of sensible measures to promote economic growth along with supply side measures that, in time, will remove the disincentives to work for those who say they would prefer to work, such as the disabled and mothers of young children.

An obvious way to improve productivity is to get more people working. 

The unpleasant changes to personal tax rates were already made last Autumn. The chancellor said he was keeping Isa limits unchanged – just to let you know he had been thinking about whether or not the regime was still too generous.

On the plus side, Chancellor Hunt undid the wilful damage done by two previous Conservative chancellors by abolishing the Lifetime Allowance (LTA) for pensions.