LONDON (MNI) – UK Chancellor of the Exchequer George Osborne has
unveiled a 2012-13 Budget which is broadly fiscally neutral and a set of
forecasts from the Office for Budget Responsibility which are little
changed from last November.

This is a budget which has no significant implication for monetary
policy and allows the BOE to maintain its super loose monetary policy,
while at the same time doing something at the margins to shore up
consumption and confidence.

Osborne used the opening words of the budget to stress that his
commitment to fiscal austerity was “unwavering”, while the degree of
fiscal tightening seems set to ease up slightly in 2012-13, after that
the squeeze is back on track through 2013-14 and beyond.

As Osborne has stressed on previous occasions this fiscal
tightening allows the Bank of England to continue to follow a course of
“monetary activism”, leaving the heavy burden of economic stimulus to
the central bank.

The OBR raised its 2012 growth forecast to 0.8% from 0.7% and said
that the economy would avoid a technical recession despite the still
precarious funding situation in the Eurozone and deteriorating global
growth prospects.

Next year growth is forecast at 2.0%, down from 2.1% previously and
the 2014 forecast is unchanged at 2.7% and then at 3% in 2015 and 2016,
with these projections below the BOE’s forecasts in the February
Inflation Report for 2.76% in 2013 and 3.09% in 2014.

The OBR acknowledges the domestic UK economy goes into 2012
carrying “more momentum” than previously expected and that Q1 will see a
positive growth result.

A grimmer-than-expected Q4 – owing to the practical freezing up of
Eurozone funding in late 2011 – and a more buoyant-than-expected Q1
appear to have cancelled each other out in that respect, leaving an
economic forecast which is, as OBR Chief Robert Chote said, a bit more
pessimistic than the BOE’s and a bit more optimistic than the private
sector consensus.

So, there is not that much of a contribution from growth to this
new and lower borrowing profile. The OBR left public sector net
borrowing in 2012-13 unchanged at stg120 billion, the 2013-14 PSNB is
reduced to stg98 billion from Stg100 billion, 2014-15 is reduced to
stg75 billion from stg79 billion and to Stg52 billion from Stg 53
billion in 2015-16.

These reductions help the government meet its dual fiscal targets
of eliminating the cyclically adjusted deficit over the next five years
and getting net debt on a declining trajectory by the end of the
forecast horizon.

Despite Osborne’s insistence there would be no budget giveaways, he
made a bolder-than-expected move towards the long-term goal of taking
the poorest out of income tax altogether, raising the tax free threshold
to stg9,205 from stg8,105 at a cost of stg3.5 billion. That should also
give consumer spending a fillip this year despite continuing high energy

The move is the single most significant step in this budget. The
step will start to impact significantly on net disposable incomes this
year, but will have its most stimulative impact in 2013-14.

The fragility of demand has been a worry to the BOE’s Monetary
Policy Committee as well, many of whose members have been concerned that
falling inflation might fail to boost real disposable income in the
event of an oil price spike. The move, which will boost average
household income by around stg220 a year, or as Osborne said Stg170 in
real terms, may help assuage those jitters.

Despite this move, pension protection insurance windfalls and
higher asset prices (thanks in part to quantitative easing) the OBR
still believes that consumer spending will remain a “drag” on recovery
until 2014 when wages are finally expected to start outstripping

As Chote puts it – “The Budget is broadly neutral in terms of
giveaways and takeaways over the forecast horizon” but the changes
should support consumption.

How the BOE Monetary Policy Committee will view it is an
interesting question. In the interest of remaining politically
impartial, one expects Governor Mervyn King to stress this is a net
neutral for monetary policy but at the margins it may help allay some of
the committee’s downside concerns on consumption.

A pledge to ditch the fuel duty escalator if the oil price rises
too high should also go in the same direction.

Other measures included cuts to corporate tax rates, to boost North
Sea oil field development and production and a politically important cut
in the top tax rate to 45% from 50% – all of these helping to underpin
the theme of a budget ‘earning its way to recovery’ – but these are
small fry in comparison and did not meet with plaudits from the business
lobby – tellingly.

Today’s set of minutes from the BOE MPC’s March meeting showed some
worries that “elevated” Eurozone funding costs were starting to feed
through to UK households as well as over the lurking oil price threat to
consumers’ pockets.

Overall, and within the continuing constraints of austerity, the
budget may at least provide a marginal boost to confidence.

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