Investment Clock insights

Summer Budget


Ian Kernohan

8 July 2015

Political context at home and abroad:

The most important aspect of this Budget is its political context: the first majority Conservative government for two decades. This enabled Mr Osborne to produce a radical Budget and go further on welfare reform than he would have been able to under the previous coalition government.  The government's majority is small, so there is a sense that difficult long-term decisions must be taken early, before the inevitable mid-term unpopularity sets in, and the European Referendum starts to dominate the political discourse. The crisis in Greece also creates a context in which sorting out the public finances should be a priority.  His major political and economic goal is to create a structural shift in the balance of tax and public spending, in effect reversing much of the legacy of Gordon Brown

Fiscal squeeze but:

  1. Deficit reduction and in good shape
    The big macroeconomic message from the March budget was quite a large fiscal squeeze in initial years of the parliament.  The goal is essentially unchanged, however the profile of deficit reduction has been smoothed and a surplus is pencilled in a year later than in the March Budget.  No year will see spending cuts as large as those seen in the period 2011-13. The new fiscal rule mandates the government to run a surplus in normal times. Whether these fiscal projections actually materialise however, is a separate question. Osborne has shown in the past that he is able to adapt to changes in economic circumstance. Macro policy flexibility is one of the great benefits of being a sovereign borrower in your own currency, something denied to countries in the eurozone.
  2. Continued growth in UK economy
    The fiscal squeeze has been in place for some time and the public finances have been improving more rapidly than expected in March. Despite this, the economy has continued to grow and grow quite rapidly, so parallels with the early part of the last parliament shouldn't be stretched too far: back then, inflation was high and created a major squeeze on real incomes, whereas now employment levels are rising, real wage growth has picked up, and consumer sentiment is at a 15 year high. This is not a 1981-style Budget, which squeezes an economy in recession. The Bank of England had already factored in the March Budget plans into their calculations, so there shouldn’t be a material change to their assessment of the likely economic impact, except to note that the pace of fiscal consolidation is somewhat slower.

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