Roger Bootle, economic adviser to Deloitte, gives his
response to the Budget
- The central player in this budget is something which
lies beyond the Chancellor's control - growth. Although he
announced a plethora of measures aimed at increasing it,
even if these are successful, they will have their effects
only in the medium term. Growth in the short term will
depend entirely upon aggregate demand and on this the budget
had virtually nothing to contribute. For it was broadly
neutral, as the cost of its umpteen measures was met by
Economic adviser to Deloitte
- Meanwhile, the economic backdrop remains extremely
challenging. It would not be difficult to imagine growth
turning out much weaker, and therefore borrowing higher,
than in the government's plans. This is particularly true
given that higher inflation threatens to tip the MPC into
raising interest rates prematurely - at just the time that
consumers' real incomes are under serious pressure.
- The OBR's contribution to the Chancellor has not been
helpful. It has downgraded this year's growth forecast to
1.7% from 2.1%. This seems to be appropriate. (My forecast
is 1.5%.) Although this year's borrowing numbers are
projected to be £3bn lower than in the OBR's previous
projections, this undershoot is at the low end of recent
expectations. Moreover, despite slightly faster economic
growth, in 2015-16 borrowing is expected to be £10bn higher
than previous estimates.
- But these higher borrowing numbers do not reflect any
backtracking by the government on the pace of cuts but
rather the effect of higher inflation on cyclical elements
of spending like debt interest and social security.
Accordingly, my suspicion is that the markets will be
- The budget's really bold ambition - to align income tax
and national insurance - remains only that. The government
will consult but is not yet ready to act. Moreover, in
saying that the contributory principle will be preserved the
Chancellor seems to be ruling out a full merging of the two.
- The various measures affecting petrol duty will lower
the CPI inflation rate by 0.14% in 2011/12 compared to what
it would otherwise have been. Changes to air passenger duty
will also knock 0.1% off inflation, but this will be offset
by the rise in tobacco duties which will add 0.1%.
- One of the most intriguing parts of the Budget was the
announcement that the government intends to build up its
foreign exchange reserves. Short of swaps of currencies with
other central banks, this can only be done through
intervention sales of sterling on the exchanges. This
announcement could eventually open the way to intervention
to hold the pound down.