This box considers the possible effects on the economy of policy measures announced in Budget 2013. More details of each measure are set out in the Treasury’s Budget document and our assessment of the fiscal implications can be found in Chapter 4.
The Government has announced a number of policy measures that are expected to have a broadly neutral fiscal impact in aggregate between 2012-13 and 2017-18, with ‘giveaways’ almost exactly offsetting ‘takeaways’ over this period. Correspondingly, we also assume that they will have a broadly neutral effect on the economy, with no impact on the level of GDP at the end of the forecast horizon.
There is a small negative GDP effect from lower current departmental spending in 2013-14 and 2014-15. This is offset from 2013-14 by a number of other measures, including an increase in the personal allowance to £10,000 and the introduction of an employer NICs allowance in 2014-15. Taken together these measures reduce GDP growth by less than 0.1 per cent in 2013 and increase GDP growth by less than 0.1 per cent in 2014. These estimates are based on the same multipliers that the interim OBR used in June 2010. Given the relatively small size of these measures, using larger multipliers would have little effect on our estimate of the overall GDP effect.
There are a number of other measures which could affect economic activity in the medium term. The reduction in the main rate of corporation tax from 2015-16 has a small positive effect on business investment in our forecast, while the decision to abolish the contracted-out NICs rebate slightly reduces disposable income and household consumption. The Government has also decided to increase capital spending and reduce current departmental spending from 2015-16. Given the long time horizon and the fact that the overall net effect of these changes is relatively small, we have not adjusted our overall GDP forecast.
We have adjusted our inflation forecast to take account of measures that directly impact the price level. These include the decisions to cancel the September 2013 fuel duty increase and to reduce beer duty by 2 per cent in 2013-14 and raise it by RPI rather than RPI plus 2 per cent in 2014-15. These measures are estimated to reduce annual CPI inflation by around 0.1 percentage points at the end of 2013 and in the first half of 2014 relative to the continuation of pre-announced changes. This is a permanent effect on the price level but a temporary effect on inflation.
The Government’s decision to increase the personal allowance and the decision to abolish the contracting-out NICs rebate could marginally impact the labour supply decision of individuals. The higher personal allowance makes it marginally more attractive to work, while the abolishing of contracting out makes it marginally less so. The policy decision to introduce an employers’ NICs allowance could marginally boost labour demand. Given the small size of these potential effects we have not made any explicit adjustments to our forecast.
The Government has announced various measures aimed at improving the supply of UK housing and supporting property transactions. These include an extension and expansion of the Government’s Help to Buy scheme, the Right to Buy scheme and the Build to Rent Fund, and the introduction of a Mortgage Equity Guarantee aimed at high loan-to-value mortgages. The expansion of the existing schemes is likely to have a relatively small additional impact on transactions and residential investment. The details and timing of the guarantee scheme have yet to be finalised and it is therefore too early to quantify the likely impact. Overall, however, these measures, alongside the Funding for Lending Scheme, should support the significant growth in property transactions and residential investment that we forecast over the next two years.