Key measures of interest to everyone:

This was a Budget with two faces. The total discretionary tightening will build up to 8% of GDP per annum by 2015-16, larger than Canada's in the 1990s, but smaller than

  • But the tightening announced over and above that embodied in the Labour Government's plans, although somewhat larger than many outside commentators expected, was in fact fairly modest, building up to about 2% of GDP per annum. So much of the pain announced by this government would have been inflicted under Labour.
  • This Budget still hides some of the pain that will be felt because it has not yet laid out the detailed plans for public spending. That has to wait until the Spending Review due in October. All we know is that outside the protected departments, departmental spending will be cut by 25% in real terms, compared with implied cuts of 20% under Labour.
  • The deferral of the VAT rise until January 2011 was a deft move, not least because it will help to keep inflation down this year. But beyond this year the danger is not inflation but deflation. Freezes which appear to be both painful for the victims and generative of lower borrowing for the Exchequer would be neither if prices were falling. Similarly, the "triple-lock" deal on pensions would turn out to be inordinately expensive.
  • Although the Budget delivered a tightening over and above what was built into the OBR's pre-budget forecast of 1% of GDP in 2011/12, the growth of the economy has only been revised down by 0.3% of GDP. This assumes a significant crowding-in effect on private expenditure. Interest rates may go up by less than would have happened under the old fiscal policy, but there is not much scope for them to go down. Any monetary response, therefore, would have to rely on more quantitative easing. Yet this has not seemed to be very effective so far.
  • Accordingly, the great danger is that the economy turns out to be weaker than anticipated, both because of the budget and for other reasons, causing government borrowing to be correspondingly higher. The budget gives no clue as to how the government might respond.
  • This downside economic risk reinforces my view that interest rates are set to remain at or near current levels for the duration of this parliament, and that on inflation the main risk is to the downside. With many countries now competing in the austerity stakes, deflation is a serious risk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.