MarketLine Blog

A Realistic Budget on Assumptions of Austerity

Taking “24m people out of tax”, a freezing of the alcohol duty escalator, and more realistic growth forecasts seem to be the big headlines, or rumoured to be headlines resulting or will result from the 2013 budget in the UK. There seems to be little mention of investment, save in social housing – something which, of course, seems to be completely consistent with any conservative growth estimates for the economy.

Indeed, the coalition can only take 24 million people out of tax — with a raising in the tax-free allowance for any income earned to £10,000 – if (at least) 24 million people are earning under £10,000. These facts make hard reading for optimists, and an (additional) rationale for investors selling the £.

It will be investment which will be sorely missed from this budget and, seemingly, every coalition budget. What confounds these austerity-determined (and austerity-producing) policies are the rates at which the British government can now borrow at: 1.91% bond yields (as of the morning of 20/03/2013) are not that much higher than German yields. Such a situation screams for investment, and not just a programme of huge, centrally-determined public works, but investment, big and small, ad hoc and long-term, at all levels of government. Multiply these investments by even conservative estimates and growth is a necessary conclusion.

Because this is not happening, and because the 2013 budget is not recognising the current state of capital markets around the world, then inference puts the coalition as ideologically-driven, economic argument falling aside. Such a state of affairs contrasts with a country with a notably large democratic deficit; note China’s positive economic prospects coincided with a switch in economic policy, the spectacular surge in public spending in 2012. Japan, too, with the implementation of Abenomics, have cast aside inflationary fears to the wind and plan to step up investment. Whatever assumptions you make, the coalition’s economic approach looks increasingly singular.

All views are my own.

Find this interesting. You may also like Country Analysis Report: United Kingdom, In-depth PESTLE Insights.

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