Budget 2012: the effect on the UK economy

Matthew Partridge examines what effect – if any – the chancellor's Budget measures will have on Britain's economy.

So finally we have all the details of the Budget that hadn't already been leaked.

The big headline-grabbing measures were the cut in the top rate of tax and the increase in the tax-free allowance to £9,205. The corporation tax rate will fall to 24% next month, with 22% the target by 2014. At the same time tax relief for top earners was reduced. The government has closed a major stamp duty loophole and increased the top rate to 7%.

However, despite all the publicity, the impact on the deficit (our annual overspend) - or growth, for that matter -will be relatively small. This is because the chancellor has balanced any tax cuts with tax rises and cuts to child benefit (although these were smaller than expected). Market reaction has been muted with both gilts and CDS spreads virtually unchanged.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The loan guarantees might help increase bank lending to business, which in turn would boost broad money. However, past evidence suggests that such schemes have only a small impact. This is because only projects that aren't good enough to get loans at market rates will benefit.

And because the net effect of the Budget is so small, the biggest story is that the official projections for growth probably remain too optimistic. The Office for Budget Responsibility now thinks that GDP will grow by 0.8% (up from 0.5%) in real terms this year.

However, other experts are much more bearish. Capital Economics thinks it will shrink by 0.5%. And this extends into the future. While the OBR predicts growth of 2% (down from 2.1%) in 2013 and 2.7% in 2014, Capital's estimates are 0.5% and 1.5% respectively. This means that net public debt will be higher than the 76.3% expected by 2014-15. Overall, they think that "the Government will soon start finding it rather harder to bring down borrowing".

Overall, today simply confirms that the government is relying on economic recovery to come through stronger monetary growth, not a fiscal stimulus. Given that interest rates and asset purchases are the Bank of England's area, the Budget will have little impact there.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri