The Labour Party's poster in response to George Osborne's budget ©Stefan Rousseau/PA Wire/Press Association Images
Read more in-depth analysis of this year's Budget in Prospect
The theme of economic optimism that built during 2013 spilled over into today’s Budget—but only just. GDP is projected to rise more quickly over the next four years than was the case back in the autumn, and employment continues to out-perform expectations. But there are question marks over the extent to which people are feeling the benefits of growth, and the sustainability of the recovery remains in doubt.
Most fundamentally, the picture on earnings remains disappointing. The official Office for Budget Responsibility projections suggest that average wages will return to their pre-crisis level towards the end of the forecast period—a lost decade or so for pay. If the relationship between the average and the median wage that held in the decade prior to the financial crisis remains in place, this translates into an even more sluggish recovery for the typical worker. If we switch to the RPIJ measure of inflation—which includes the cost effects associated with expected increases in interest rates—the outlook for real-terms median wages looks unerringly flat for the next four years. If true, workers would be no better off by 2018 than they were at the turn of the century.
In the absence of strong wage growth, our consumption-fuelled recovery rests ever more heavily on the drawing down of savings. Just one year ago, the OBR projected that the household savings ratio would stand at 6.6 per cent in 2013, before falling to 5 per cent by 2017. Instead, the ratio has already fallen to this level, and is projected to reach just 3.2 per cent by 2018. Clearly a reliance on such dis-saving can only last for so long.
The Chancellor’s focus today on rebalancing the economy—helping the "makers, the doers and the savers"—is therefore welcome. The increase in the annual investment allowance in particular makes a lot of sense. But we’ve been here before. The latest OBR numbers suggest that business investment will grow more quickly than it thought back in the autumn, returning to its pre-crisis level by 2015 rather than 2016. But rewind the clock to 2010, when George Osborne first talked-up the need for rebalancing, and the OBR was projecting that the pre-crisis level of business investment would be restored by 2013, standing some 18 per cent above the benchmark by the end of this year.
So if the squeeze on earnings remains in place, at least we got some more tax cuts to help, right? Well, yes, but the winners are once again to be found in the upper reaches of the income distribution. Today’s announcement of another above-inflation increase in the income tax personal allowance next year is worth £62 not just to lower earners, but to all but the very highest earning taxpayers. And of course the five million or so lowest paid see no benefit at all, because they don’t earn enough to pay income tax. In total, around three-quarters of the cash giveaway goes to households in the top half of the income distribution and just 1 per cent of the cost of the policy is actually spent on lifting people out of income tax.
And today’s big surprise on savings is relatively small beer. Scrapping the 10p rate on savings income will help a minority, with most working-age families finding they either earn too much or have too little in savings to be affected. Again the biggest beneficiaries are likely to be found among the better-off. A new combined ISA limit of £15,000 is similarly likely to prove irrelevant to many, with two-thirds of the 7.6m families on low to middle incomes having less than one month’s income in savings and half having no money set aside at all.
There has been some good news for lower income families, in the form of the decision to change childcare support plans to offer more generous help to families eligible for Universal Credit in which both parents work. This change should mean that up to 900,000 working families who would have missed out under previous plans will now be eligible for 85 per cent rather than 70 per cent childcare support. This could mean a gain of £1,000 in childcare support for some poorer working families. Unfortunately it doesn’t start until 2017.
By then, we should know whether this recovery is truly rebalanced, equitable and sustainable. Or not.
