Perhaps this explains why in several quarters it is largely believed that this year’s budget is ``a neutral budget,’’ because whereas good results are largely expected, early signs point to the likelihood of matters going out of control. Holding such a view is debatable, and so this assumption cannot be dismissed right out of hand, neither can it be accepted as such. A close look at some of the key measures suggested in the budget might shed light on whether it is indeed neutral or not. Osborne (23rd March 2011), The Chancellor of The Treasury stated that, ``the Government’s economic policy objective is to achieve strong, sustainable and balanced growth that is more evenly shared across the country and between industries.’’ He further added that this was, ``… to rebalance the economy from unsustainable public spending towards exports and investment. This should support the UK’s long-term economic potential and help to create new jobs,’’ he concluded. The Chancellor simply affirmed that the measures contained in the previous budget will remain in place. This essay is an attempt to justify this claim in order to prove that this year’s budget is truly neutral. It has a 50/50 % chance of either succeeding or failing.
According to sources from HM Treasury (23rd March 2011), sustainable economic changes are seen as a way of ensuring future prosperity. Public money has been noticed to be spent in areas that are not so much important to drive the economy on. That is why the budget is meant to focus on ``exports and investments’’ as a way of putting measures in place to ``have a neutral net effect on public spending.’’ It is hoped that containing the deficit will promote the growth of the private sector.
Increasing money allocations for investments on the private sector and diverting funds from non-performing areas of the public sector is one way of trying to do so as indications from HM Treasury (23rd March 2011) suggest. At the same time the budget presumes that encouraging industry to increase volumes of their export commodities while reducing the domestic deficit will increase economic gains and improve job opportunities.
Before we look at one of the key measures that point to a budget which to a large extent is neutral, and whose forecasts might not turn into reality, here is a brief demonstration of the foregoing assertions in a flow diagram
The chart above is a clear demonstration of how different economic measures are going to come into effect in order to achieve the desired results. But here, there is no guarantee that the interplay of all these factors will bring the desired investments and growth. This is a fragile balancing act that might either succeed or fail.
In his analysis, Cohen (2011) says that The Bank of England plans to reduce inflation by encouraging growth and investment. This is to be achieved by placing stronger fiscal consolidation so that rising interest rates do not go out of control. Every effort is to be made to keep interest rates low. It should not be forgotten that this is to be done at a time when money is in short supply.
That is why this is a neutral budget because the key measures envisaged could swing either way, for instance, the general public really want to see the economy back on its feet but at the same time fear that cuts on public spending might adversely affect many sectors of the economy (Stephens 2011)
The proposed cut down on the big fiscal deficit is based on the previous year’s spending and borrowing cuts. The cloud of fear about this move is that it is not known for certain whether it will really hold and lead to any meaningful growth. As Stephens (2011) mentions, some of the steps are: targeting many enterprises to increase investments, improvement of backward areas and, creations of job opportunities for the unemployed and ``removal of progressive tax increases.’’ (Stephens 2011).
This will require a huge outlay of funds, which ironically is the very reason why the measures are in place – lack of money! According to Farrer, M., (2011) accountancy experts say, ``the surprise increase in tax to 32% from 20% on offshore drilling introduced in the March budget will damage UK competitiveness.’’ In the key measures expected to put the economy back on track, taxation is supposed to play an important role. But with experts pointing out the weaknesses in this move, I would say there is a less than 50% chance that this will spur economic growth. Instability and uncertainty in the energy sector is likely to affect the rest of the economy negatively, because as tax experts from The Institute of Chartered Accountants in England and Wales project, Farrer, M., (2011), even though corporation tax might be good for business and bring growth, ``the North Sea policy could deter growth in the area.’’ Obviously, this will have far reaching negative consequences to the rest of the economy as a whole. In this respect, the budget is a ``neutral budget’’ because after all, as claimed by The Association of Chartered Certified Accountants (ACCA), `` while the measure is clear, simple and targeted, it fails on the principle of stability and supporting growth.’’ How, for example, are jobs going to be created or investment in the private sector encouraged while ``the budget anti-tax avoidance measures’’ are not friendly to (SMEs) small and medium sized businesses? This move will definitely hurt the business sector.
It is for this reason that analysts elsewhere, Milliken (2011), said that, ``Britain is dependent on what may be over- optimistic forecasts of strong growth in 2013 and 2014 to meet deficit-reduction targets needed to keep its triple-A credit rating.’’ This sentiment would have presented a watershed of opinion if at all it stood on its own. But the picture that is emerging from various expert quarters all point to doubts about the effectiveness of the proposed measures. Different opinion indicates uncertainty. They, experts, think the expected growth, increase in investments, fairness and job creation are based on nothing tangible or practical but are simply pegged on ``over-optimistic forecasts.’’ One major hurdle that the coalition has to overcome in order for the projections to enable full economic recovery in the next two years is complete elimination of the existing budget deficit, otherwise as Milliken (2011) quoting a rating agency states, ``slower growth combined with weaker-than-expected fiscal consolidation could cause the UK debt metrics to deteriorate to a point that would be inconsistent with an AAA rating.’’
The picture that all these opinions from experts present is indeed bleak if they are to be believed. One ray of hope though is based on the premise that since coming to power, the coalition has done a good job in reducing the deficit from a double digit to a single digit status. Given the fact that government has managed to do this in a relatively short time, this year’s budget measures should not be dismissed out rightly by the so called ``experts’’ but rather, it should be viewed as a possible better model for successful economic recovery. So from whichever stand point one looks at the March budget, when all factors involved come into maturity, the chancellor might have the last laugh! This, however, is based on long term projections of different and unstable economic environments. In the short term, and given the prevailing unstable deficit trends, the doomsayers carry the day with their predictions.
All these opposing views seem tenable and likely, and therefore summarizing the March budget as ``a neutral budget’’ makes a lot of sense. If the tax measures, coupled with export drives and increased funds for investments pay off, then businesses will thrive thereby opening up the job marketplace for more employment. In such a situation there will be stability and fairness in many key sectors of the economy. Relative prosperity might trickle down to the disadvantaged.
But should this not happen, inflation will increasingly rise, unemployment will stay and the level of deficit might shoot back to where it was. This will effectively force government to embark on short term solutions; a scenario that will not favor business and growth at all. Perhaps what can sum the situation aptly are comments by Paris (2011) from Reuters who said that, ``cutting budgets will mean the government has to prioritize areas in which it invests…’’
But as experts have predicted, increased taxation on the energy sector, and instituting stronger tax avoidance measures will impact badly on the less advantaged. Prices will rise, inflation will shoot up, small businesses will die and unemployment will spill out of control. Arguably, these are not the stuff that a stable and fair economy that spurs growth is made of. The growth expected can only have effect on the medium term, and as some experts view it, this will not get much support from the budget. (Bootle 2011)
Reference
Cohen, N., 2011. MPC Keeps Interest Rates on Hold. The Financial Time, 5th May.
Bootle, R., 2011. Budget 2011: still banking on plan A. Delloite: Press hotline, March 23.
Farrer, M., 2011. Osborne’s North Sea tax raid criticized in report by top accountants. The Guardian, 3rd May, pp. 29.
Milliken, D., 2011. Fiscal goals hinge on optimistic growth outlook. Reuters, pp. 1/17.
Parris, J., 2011. UK Budget 2011: Live Coverage. Reuters, March 23.
Stephens, P., 2011. The Chancellor’s autopilot is locked to plan A. The Financial Times, 23rd March.