Global Markets

Political tactics at play in UK budget

26 March, 2014 | Posted By: Oren Laurent

By Oren Laurent
President, Banc De Binary

When UK Chancellor of the Exchequer, George Osborne, presented his budget last Wednesday, it was as much about political strategy as about the economy. This was to be expected as the Conservatives gear up for a general election next year, and subsequent opinion polls suggest that Osborne’s tactics are working.
People-pleasing, newspaper-headline-friendly measures include 1 pence off the cost of a pint and the decision to freeze alcohol duty on spirits, as well as the reduction in air passenger duty. The changes to pensions, which will allow people to take double the amount in savings as a lump sum, 30,000 pounds, and which remove the need to buy an annuity, are significant, but in reality will only affect a limited number of wealthier middle-aged and elderly people.
In general terms, the Chancellor stuck to his central policy of deficit reduction which has guided his decisions since coming to power in 2010. He revealed new forecasts that the Government will aim to borrow 107.8 bln pounds this year, 6.4% less than the previous financial year.
More interesting, albeit less immediate, are the Chancellor’s verdicts about Britain’s future austerity and fiscal planning. He judged that public spending must be reduced to 38% of GDP, which would put it among the lowest ratios in four decades, and that the government should generate a current budget surplus to lower the public debt ratio to pre-crisis levels of 30% of GDP by the mid-2030s. No doubt these action points will form the basis of the Conservative party’s economic policy in the upcoming elections.
A YouGov poll for The Sunday Times reveals a post-budget surge in Osborne’s personal ratings and puts the Conservatives on 36%, just a single point behind the opposition, the smallest margin we’ve seen in five months. Arguably, Osborne’s greatest achievement was to present such a clear agenda. We haven’t yet heard such a comprehensive stance from his rivals and Labour politicians are now urging leader Ed Miliband to abandon complicated rhetoric in favour of easy to understand policies.
So far, under Osborne’s steering, the economy is reviving and employment is soaring, but Britain is still living beyond its means and a significant journey remains before the economy is restored to full health. There is certainly room for debate about the strength of the correlation between public debt and economic growth. It is now the turn of the opposition parties to consider their strategy in response to the budget: will they pursue austerity measures or will they present the case for a consistently higher share of public spending and taxation?