An analysis of the budget

According to George Osborne, Britain had the fastest growth rate compared to the other economies in the G7 in 2014. He boasted that the rate of employment was at an all time high at 73%. Inflation has been reduced primarily because of the falling oil prices and this will have the effect of ending a seven-year stretch of a drop in real wages. Other than that, the government is saving money on inflation-linked debt interest payments and on benefits, which are linked to prices. Due to the fact that the UK largely imports oil, domestic tax receipts have not been affected.

This means that Mr Osborne is nearing his goal of closing the deficit. When the coalition came to power in 2010, the Conservatives argued that Britain's structural budget of 9% of GDP was a danger to the economy and vowed to close it. Along with the Liberal Democrats, they undertook austerity measures which saw a fifth of departmental budgets being cut.

The euro zone crisis and an economic slump in Britain resulted in the chancellor discarding his plan of closing the structural deficit by 2015. The date has been pushed to 2018 instead. And there was some good news on that score. Britain's fiscal watchdog, the Office for Budget Responsibility (OBR) revised down its prediction for borrowing by £1 billion- 2 billion a year for most of the next parliament. The national debt as a proportion of GDP would come down in 2015-16. Mr Osborne was adamant that this budget was fully funded.

His policy announcements can confirm this but the same cannot be said about his plans for total spending. The chancellor plans on making deep cuts to public spending for the next two years. This is deeper than any annual cuts under the coalition government. The cuts will enable him to keep his promise of balancing the budget to achieve a surplus in 2018-19.

However, on Mr Osborne's new plan, daily departmental spending would rise by £24 billion in the last year of the next government (the biggest increase in ten years). In cash terms, this totally goes against the prior consolidation even though growth ensures the books still balance. Taking into account economic growth would mean that departmental spending would be 9% higher at £31 billion. This could also mean cuts that are ultimately only about half as bad as they were facing before Mr Osborne for departments outside the protective ring-fence consisting of the NHS, schools and international aid.

This is a ruse but overall good politics. The chancellor had implied in the autumn statement in December that he planned to reduce public spending to 35% of GDP by the end of the next government, the lowest since the 1930s. The Labour party pounced on that opportunity, accusing Mr Osborne of undoing the post-war welfare state. This was effective when applied to man from a well-to-do background but his plan appears to have deflected that.

The budget was more than just deception because most Britons will benefit from an increase in the amount earned before paying taxes. It will be raised to £10, 800 in 2016-17 and £11, 000 the next year, adding £80 to most pay packets. This was a popular Liberal Democrat idea. The Tories and the Lib Dems promised to raise it to £12, 500 if re-elected, which would mean that those on minimum wage would not have to pay tax at all. But the threshold is already so high that according to the Institute of Fiscal Studies (a think-tank), the poorest fifth of workers did not have to pay income tax in 2014. The latest rise benefits the middle and high income earners more than lower ones.

Besides that, the chancellor announced more sweeteners. Those saving for their first home will receive subsidies of up to £3000 each. But increasing demand without supply will cause prices to rise, benefitting homeowners the most. Other plans include a tax reduction for the North Sea oil industry (the only section of the economy to have suffered because of the falling oil prices) and a plan to devolve more tax revenue to Manchester. This would be paid for by three sources of revenue: a clampdown on tax avoidance, higher taxes on banks (these two are bound to be popular) and lower tax subsidies for huge pension pots (Labour announced this policy just weeks ago).

On the whole, the budget was an odd mix. The chancellor aimed to show responsibility by ensuring that his pre-election plans are fully funded. On the other hand, his plan will sacrifice credibility for political advantage. He formed the OBR to prevent chancellors from manipulating the growth forecasts but he has now demonstrated that the spending figures can be tampered with.

The upcoming annual budget

After the financial crisis, the Conservative-Liberal Democrat coalition formulated a plan for the British economy and stood its ground. It was intended to see unemployment plummet and rapid growth that will put Britain ahead of other big rich countries in 2014.

The 18th of March marks the day the chancellor of the exchequer, George Osborne gives his budget speech less than two months before a general election that is more likely than not to centre around the economy. He is sure to mention the words "long-term economic plan" to assert his devotion to a fiscal surplus for Britain by 2018-19. However, the sad truth is that Mr. Osborne derived his successes from abandoning his original goals rather than sticking to them. Next week, unless his budget plans are more suitable, Britain could end up paying a heavy price.

Undoubtedly, with Mr. Osborne as chancellor, the government has done reasonable things such as reducing corporation tax, increasing the income-tax threshold and hiring Mark Carney from Canada to be the governor of the Bank of England. But it operated at its best during times when it has been least consistent in three main areas.

The first is fiscal policy. In 2010, the Tories promised to get rid of nearly all of Britain's structural deficit by the end of their term, which was estimated to be at 8.7% of GDP. Currently, the coalition is only half-way there. The amount of borrowing this year would likely amount to be 5% of GDP or £90 billion. This is £55 billion higher than originally planned. The chancellor pushed back his deadline for closing the deficit in light of two years of weak growth, due to austerity measures and a European slump. This change was needed. Following the plan would mean higher taxes or larger cuts to public spending or both. It would likely result in the economy going back into a recession and might have destroyed public services. As it is, Britain has managed with deep but steady cuts. The crime level is down and the sky has not fallen on the NHS or local government.

The second change of plans was also welcome. Previously, the coalition government followed the previous Labour government's plan of reducing capital budgets and so public investment (the easiest one to cut quickly) fell by 35%. That was a bad idea. Spending on infrastructure is crucial in ensuring long-term growth and is chronically low in Britain. Luckily, Mr. Osborne changed this starting in 2011 and once again, his change of heart was good.

The best change of course was the biggest and also the most embarrassing. Prior to becoming prime minister, David Cameron vowed to decrease the annual net migration down to the "tens of thousands". Despite this, the latest figure for net migration was at a staggering 298,000 and counting. But because immigrants are young, healthy, diligent and enterprising, they have raised growth and boosted tax revenue. A huge decline would have costed the economy because GDP has increased by 7.8% under the coalition government and GDP per person has risen by only 4.2%.

Some might say that the inconsistencies of the government are long gone or that doing the right thing is more important than saying it. But plans focus the mind and Mr. Osborne is in danger of focusing minds on the wrong matter. Britain's biggest concern is the low productivity growth, not the deficit. This has resulted in output per hour being 2% below its peak in 2008. It is probable that Mr. Osborne is aware of that and he may shift priorities later. But that might not be likely because U-turns reflect badly on the government, which means that plans have a tendency to last for too long. The best course of action is to form a plan for productivity and stick to it.

The limitations of voters in choosing economic policies

The decision about whether to modify Greece's bail-out has sparked claims about a lack of democracy. It is said that Greece's creditors are overriding the electoral mandate of the Syriza party.

In reality, voters have always faced constraints on their freedom to choose the economic policies they want. They have a limited ability to pursue redistribution of income by taxing the minority i.e. high income earners because there is a point at which higher taxes lead to lower revenues as effort is discouraged. We do not know the point at which this occurs but considering how we are now living in an era of mobile people and firms, the threshold might be lower than it used to be. Furthermore, when countries rely on international creditors for finance, they have no control over the terms on which they borrow and they cannot coerce creditors to roll over their debts. Although there is nothing stopping countries from defaulting on their debts, in the short-term default would probably lead to budgetary restrictions. Voters may end up with austerity after all.

As electorates evolved over time, economic regimes followed suit. The Depression in 1945 resulted in most governments implementing Keynesian demand management by allowing deficits to grow to avoid recession. However, the policy stopped working in the mid-1970s because of simultaneous high inflation and unemployment, also known as stagflation. The policy regime was blamed because politicians decided to set interest rates to gain electoral advantage and this caused inflation to rise. After that, central banks started controlling economic policy by using interest rates to manage the cycle. They soon became unpopular when inflation was being squeezed out of the system in the late 1970s and early 1980s. This changed when inflation declined and interest rates fell and were thought of as the 'great moderation' of low inflation and steady economic growth.

This shift was a clear deviation from democratic control of economic policy. Even though governments still dictate the mandate of the central banks and appoint the people in charge, voters who disagree with the policies of Janet Yellen and Mario Draghi (the two most prominent economic decision makers in America and Europe) cannot get rid of them. The importance of central bankers has been reinforced after the financial crisis in 2009. During that time, most politicians were not willing and able to provide fiscal stimulus. On the other hand, central banks could both deliver monetary stimulus and buy government bonds through quantitative easing (QE), which made it easier to finance deficits. Also, it appeared to run smoothly because hyperinflation was avoided, going against predictions.

However, those in Europe who voted for the single currency do not have a local central bank. The European Central Bank has only just started QE and of course, such countries have not devalued their currencies as they were unable to (a move that put Iceland on the road to recovery). Critics claimed that the single currency should not have been created without political or fiscal union. Greeks may not like the European superstate that could easily make big fiscal transfers. They might be just as powerless as how they are when negotiating with their creditors. The weight that Greece has in a euro-zone electorate is very small.

This leads on to an even bigger problem. Politicians gain power on the basis of their economic promises to their domestic electorates. But the deciding factor of whether their economies will prosper is the state of global economies, not local e.g. whether China's economy will do well or what the oil prices are like, etc. National politicians will still take the blame for the effects of those things despite it being out of their control. This will further strengthen the cynicism of voters about politics and damage the support for democracy.