Still on the UK 2012 Budget. From the Budget 'Red book' and the OBR report, I have found a few interesting graphs.
First one is from the OBR, showing the UK output gap:
|Source: Office for Budget Responsibility: Economic and Fiscal Outlook, pp. 39|
Is the shock that hit the UK economy in the crisis permanent or temporary? In other words, is the GDP trend line for the UK going to readjust to a lower steady state level, or is the GDP growth expected to bounce back shortly? Perhaps according to this the UK GDP is likely to return to its pre-crisis trend line, however in a much longer time span than anticipated. This only shows the size and effects of the distortion created during the crisis and the fiscal shocks (internal and external) that hit the country and reduced its productive economic capacity. Looking in the long run, any shock is temporary, even though a longer recovery will shift the medium term trend line a bit downwards. A completely different question is whose fault is it that the recovery is so long or whose fault is it that the output gap is still negative, around minus 2%.
The second graph is from the Budget 'Red book', and is showing a forecast of the government's commitment to reduce the budget deficit by 2016/17 (the actual balance is not shown):
|Source: HM Treasury, 2012 Budget, pp. 18|
Observe the huge gap as the Brown government decided to bail out the British banks. The result was a completely unsustainable fiscal position that had to be punished on the elections in 2010. The current government is sticking to its commitment to cut spending, which the numbers clearly show and which is the primary source of attacks against British austerity from many of its critics. But even though public sector cuts are obvious and welcomed, other areas of private sector intervention are not. For the British austerity case, I refer the reader to a former post.
Finally, here is a short cost-benefit table of the budget, from the Economist:
|Source: The Economist, "A big splash with little cash", 24th March|
As it can bee seen, the announced policies are likely to produce a net benefit by the end of this year, while resulting in a net cost in the following year (which is still only around 0.1% of the GDP). By far the largest loss of revenues is to come from the increased personal allowance. This will be partially offset by a series of small measures such as the 'granny tax', the increased bank levy or the reduced special spending reserves. The stamp duty on expensive homes (the mansion tax) will bring in a total of only 400m, which makes it hard to justify from any other perspective besides a political one.
I was asked the other day whether I think the Budget was still a Keynesist policy response, a supply side reform (because of decreasing tax rates, reducing red tape in planning, and even announced road privatization), or something in between. My answer was yes, Osborne is still a Keynesian, as he still tends to believe that the government can pick winners (gaming), still wants the government to drive the infrastructural growth and still wants to stimulate the businesses to grow, by trying to influence the prices of credit. Even though corporate and personal income taxes did fall, and the personal allowance was raised so that more people are taken out of taxation, some elementary mistakes of guiding private sector hiring (youth contract) and investments still exist. This budget was, as I said, an improvement, but not the complete policy for growth.