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Change of prescription may be needed to revive ailing economy

Watching the Chancellor deliver his fifth Budget yesterday, it was easy to draw parallels with the Roald Dahl book George's Marvellous Medicine.

In this children's tale, George Kranky has trouble getting the ingredients of his concoction quite right, with unintended consequences. He tries to use the medicine to make a chicken grow, but the expansion is seriously unbalanced and it has extremely long legs. The mix is altered and tried out on another chicken, but it grows an extraordinarily long neck.

George Osborne made much yesterday of the Office for Budget Responsibility (OBR) having upgraded its UK growth forecasts again, on top of upward revisions at the time of his "autumn" statement in December.

But the remedial policies on which he focused yesterday, aimed at boosting business investment and exports, highlighted the worryingly unbalanced nature of the recovery so far. Exports and business investment have proved much weaker than Mr Osborne and his Coalition Government colleagues had hoped.

Experts including Bank of England Governor Mark Carney, appointed by Mr Osborne, have been among those to warn about the unbalanced nature of the recovery, and the degree to which it has been driven by the spending of consumers who are already carrying a heavy debt burden.

It is also important to put the upwardly revised UK gross domestic product (GDP) growth forecasts in context.

Mr Osborne provided his own context, declaring the upgrade to the 2014 expansion forecast since last March was the "biggest upward revision to growth between Budgets for at least 30 years".

The 2014 growth prediction had, he noted, been raised from the 1.8% rate projected a year ago to 2.4% in December and to 2.7% in his latest trip to the dispatch box.

However, he did not mention previous reductions in the 2014 growth forecast or the fact that the latest upward revision only takes the projection of expansion this year back to where it was when he delivered his first Budget in June 2010.

It is also appropriate, when considering the performance of Mr Osborne and the UK economy, to compare the OBR's projections at the time of his first Budget with what actually transpired.

As Mr Osborne hiked the scale of annual public spending cuts and tax rises to be in place by 2014/15 by £40 billion to £113bn in his debut Budget, the OBR projected growth of 2.3% in 2011, accelerating to 2.8% in 2012 and to 2.9% in 2013, and then easing to 2.7% in 2014 and 2015. Figures from the Office for National Statistics show that UK economic growth slowed to 1.1% in 2011, from 1.7% in 2010. It then slowed significantly further in 2012, to just 0.3%, before accelerating to 1.8% in 2013, still well adrift of a historical average annual rate of growth put at about 2.75% by Mr Carney.

It is also crucial to note UK GDP in the final three months of 2013 was 1.4% adrift of its peak in the first quarter of 2008, ahead of the Great Recession. If the 2010 forecasts had been correct, this peak would have been regained a long time ago.

The OBR may have edged up its forecast of growth next year from 2.2% in December to 2.3%, but this is still significantly below its projection back in June 2010.

Looking further ahead, the OBR is now projecting growth of 2.6% in both 2016 and 2017, and of 2.5% in 2018.

The unbalanced nature of the recovery is writ large in the economic data. Mr Osborne had, in his March 2011 Budget, spelled out his vision of "a Britain carried aloft by the march of the makers". But manufacturing output in January, the latest month for which official figures are available, was lower than when Mr Osborne told us of this dream.

In terms of exports, it is interesting to note the OBR forecasts that net trade will be a drag on growth this year. And UK business investment dropped by 1.2% in 2013. The OBR is predicting a spectacular rebound, forecasting that business investment will jump by 8% this year, 9.2% in 2015, 8.1% in 2016, 8.7% in 2017, and 7.7% in 2018. The potential for disappointment on this score seems significant.

Mr Osborne also made much of a reduction by the OBR in its public-sector net borrowing projections.

However, its new projection of underlying net borrowing in the 2014/15 fiscal year, at £95.5bn, is down only marginally from the £96bn figure forecast in December.

In Dahl's book, George Kranky keeps trying to get his marvellous medicine right, hoping to replicate previous success with a hen. This early success created a giant hen, with everything in the right proportions, which laid huge eggs.

The success with the hen has some parallels with former Conservative chancellor Kenneth Clarke's performance in the early 1990s, when, with a degree of good fortune, everything came together at the right time and the economy grew even as public spending was cut.

For several years after pouring his tens of billions of pounds of additional public-spending cuts and tax hikes into his policy pot in 2010, all Mr Osborne's medicine appeared to do was stunt growth.

Professor Brian Ashcroft, emeritus professor of economics at the University of Strathclyde, last week reiterated his belief that the UK would have recovered much faster without Mr Osborne's fiscal consolidation programme.

With the 2015 General Election getting ever closer, Mr Osborne decided last year to add a potentially dangerous ingredient in the form of huge government-backed schemes to inflate the residential property market. He has this week underlined his commitment to this strategy.

These major moves to fuel the housing market appear to have encouraged spending by debt-laden consumers, potentially storing up trouble for the future when base rates rise from their record low of 0.5%.

Mr Osborne certainly gave the impression again yesterday that he thought his economic medicine was pretty marvellous. He was in truly triumphant form.

However, former Bank of England Governor Sir Mervyn King made the point during the dark days of recession that, even when recovery came, it might not feel like it. Sir Mervyn's observation seems more in keeping with the current public mood than Mr Osborne's triumphalism.

In some ways, George Kranky's early batch of medicine might have been more useful than Mr Osborne's prescriptions, in these economic times that remain very difficult for many.

That giant hen would, after all, be a welcome visitor at the many food banks that have become an increasingly common feature of Mr Osborne's time as chancellor, amid his welfare cuts and after a long period of price inflation running way ahead of pay rises.

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