Budget 2013: RBS Group economists' view

Budget 2013: RBS Group economists' view

The Chancellor sets out what he expects from the Bank of England

Economic Analysis

20 March 2013

“Today, I’m going to level with people”

The Chancellor is nothing if not persistent. Standing before the House of Commons, George Osborne once again reaffirmed his commitment to Plan A. As in the Autumn Statement and the previous Budget, the measures announced today, alongside previously announced measures, have combined to produce another fiscally neutral set of policy changes. Beyond this, the Chancellor announced a new mandate for the Bank of England and some new spending designed to support those looking to buy a house and boost the supply side of the economy.

“It is taking longer than anyone hoped”

The Office for Budget Responsibility downgraded its forecasts for growth, citing a combination of weaker than expected prospects for both domestic and external demand. The forecast for 2013 was halved from 1.2% back in December to 0.6% today. Back in 2010, the OBR was hoping for growth in 2013 of 2.9%. Growth is expected to exceed 2.3%, what the OBR thinks is the UK’s “trend” rate of growth, only from 2015 onwards.

Net debt relative to the size of the economy is now expected to peak in 2016/17, a further one year later than was expected as recently as December. The new peak is expected to be 85.6%, which is 15 percentage points above what was expected in 2010. While the supplementary target has now well and truly been missed, the OBR thinks that the target of balancing the budget (adjusting for the business cycle) within the next five years is more likely than not to be hit.

“So I am setting out today an updated remit for the Monetary Policy Committee”

At present, the Bank of England tells us each month what interest rates will be for the next few weeks, never giving a clue as to what it is thinking of doing over the longer term. But it will now be given scope to behave more like the US Federal Reserve. The Fed currently says it will keep rates low as long as US unemployment is above 6.5% and inflation is under control. That gives Americans a clear steer about when it will raise rates. The idea is that this forward guidance will convince people and businesses that interest rates will stay low for a long time, giving them incentives to borrow and spend. The MPC will give its assessment of the pros and cons of this tool in August’s Inflation Report.

“A new offer to the aspiration nation”

The Chancellor’s supply side policy changes included £3bn of new infrastructure spending, a further reduction of the headline rate of corporation tax to 20% as of 2015 and the introduction of a £2,000 Employment Allowance to create more room for small businesses to increase hiring. He also announced proposals for the UK’s planning system and regulatory environment, although we will have to await the summer for details.

Households were also the subject of Mr. Osborne’s “aspirational” policy changes, with the announcement of a lohave a new guarantee scheme for eligible new mortgages. This will be paid for by fees charged to lenders in such a way that they compensate the Government for expected losses, the cost of capital and administrative costs. The First Buy scheme, whereby the Government provides an equity loan on up to 20% of the value of a new build house, was also extended. The Chancellor also announced a milestone for the personal tax allowance, which will rise to £10,000 as of 2014. The increase in fuel duty that was planned for September has now been scrapped. While the Government’s policy changes since 2010 have hit the top 10% of earners the hardest, the Treasury estimates that the bottom 10% of earners have been hit almost as hard. The only earners that have benefitted from Austerity thus far have been in the “upper middle income” brackets.


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