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The U.K. economy is flat-lining and austerity is blamed. But George Osborne should resist mounting pressure to reverse course or slash taxes in his third budget as Chancellor of the Exchequer on Wednesday.
Few British governments since the Thatcher era have come in for as much criticism as the current administration. Mr. Osborne inherited an economy with a deficit of 11 per cent of GDP. Recession was inevitable as big housing and lending bubbles deflated. The Chancellor set out on the tough path of adjustment but is getting little thanks for it.
He got one thing badly wrong. By charitably ring-fencing the biggest-spending departments – health and education – he forced all the austerity on the rest of the government. That has made progress on spending cuts and deficit reduction slower, limiting room for manoeuvre. Yet Mr. Osborne has too little political capital to change course toward still more rigorous austerity. The National Health Service has become an untouchable totem.
Eventually, a smaller state will make lower taxes affordable. But it's hard to justify broad tax cuts now with the deficit still exceeding 7 per cent of GDP. Increasing borrowing for the sake of consumption might alarm markets.
Some small stimulus would help. The Confederation of British Industry has wisely called for the construction of 50,000 homes, by putting €1.25-billion ($1.93-billion) into the affordable homes scheme. It is construction that has been holding back economic growth. Had the sector merely been flat in 2012, rather than suffering an 8-per-cent fall, the U.K. economy would have grown by 0.6 per cent, and not remained flat.
Mr. Osborne could also sensibly release funds for road and other transport improvements. Big projects are too expensive and would make no difference to growth this year. Small-scale improvements and repairs can be quick to create jobs and growth. And the government could cut taxes for the least well off. The tax-free income ceiling is due to increase to €9,440 in the new tax year. It would cost Mr. Osborne around €3.2-billion to get up to the €10,000 figure.
How can this be funded? Limiting civil service pay rises to 1 per cent for two years will save an annual €1-billion in 2014-15. Mr. Osborne could extend the policy, make further cuts in departmental spending and retain a tough stance on welfare. Further erosion of tax breaks on personal pensions could bring in about €600-million. Eliminating the 25-per-cent tax-free lump sum element of final pensions could generate €2.5-billion per year.
This is still just fiddling with a few billion pounds in an economy of €1.5-trillion. But Mr. Osborne can do little else. He must be prepared to be public enemy Number One until the results of his policies come through.