Will the Budget make any difference to the economy?

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Is it all down to lower inflation rather than what's in the Budget? In terms of the economy, it seems that lower prices have a larger impact than, well, anything else.

This line in the Office of Budget Responsibility (OBR) report accompanying the Budget certainly caught my eye.

The independent OBR says: "The coalition government's policy decisions in this Budget are not expected to have a material impact on the economy."

Of course, the Budget is one part of a larger set of economic policies, but the OBR is placing a great deal of emphasis on low inflation in its forecasts of where the economy is heading.

The key headline figures depend on prices remaining low, and that has a lot to do with global factors too.

Global growth

For instance, the OBR says it expects lower inflation to boost incomes and consumer spending, which was why it raised GDP growth forecasts to 2.5% and 2.3% respectively for this year and next year.

It's worth mentioning that the forecasted growth rates until 2019 are all lower than the 2.6% growth recorded last year.

It's largely due to the global economy, slower world trade and higher risk emanating from the eurozone. So more than 2% economic growth is certainly welcome, but there's an undeniable impact from abroad.

Also, notably, the OBR expects the UK will have its first year of "material" growth in real wages since the crisis, up 1.4% this year and 1.75% on average over the medium term.

This is also due to the near-term fall in inflation and stronger sterling, which also helps to keep prices low.

The big caveat is that both the GDP and wage growth forecasts depend heavily on the "long-awaited return to sustained productivity growth" which I have written about before.

So more income in people's pockets will certainly be welcome after years in which wage growth was slower than inflation.

Oil price

But counting on productivity growth is a big IF, and that is a domestic policy issue. There wasn't that much discussion of productivity in the Budget, which may prove to be a glaring omission.

The OBR goes on to say that the biggest change since its last forecast is the fall in the price of oil, which is a huge factor that's lowering inflation.

Now of course, it's not all down to inflation when it comes to public finances. But in terms of GDP growth and incomes, it seems that inflation is playing a large role and global economic factors certainly are having an impact.

After all, oil prices are determined globally and sterling is a freely traded currency. The pound will be affected by quantitative easing in the eurozone and a stronger dollar, among other factors, such as what the Bank of England does with interest rates.

It also means that external forces loom large, even if the parties may want to claim otherwise.

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