An economic stimulus for the UK: the chancellor's choices

Article

This briefing analyses the costs and relative benefits of several of the main options for a temporary economic stimulus open to George Osborne as the budget approaches, and also assesses the progressive credentials of each option by comparing their effects on the highest and lowest earners.

The UK's economic recovery remains fragile, despite recent improvements in retail sales and business confidence. As the chancellor prepares to deliver the 2012 budget, he should consider the arguments for a temporary economic stimulus through increased infrastructure spending or tax cuts to boost consumer spending. In the US, Barack Obama's payroll tax cut contributed to a 2.2 per cent increase in consumer spending last year - by contrast, consumer spending in the UK shrank by 0.8 per cent.

No single measure ticks all the boxes in terms of delivering a quick, temporary, effective and progressive stimulus to UK consumers and the economy: increasing infrastructure spending, for example, provides the best 'bang for buck' but is slow to implement; simply cutting the rate of income tax or national insurance is relatively easy to do (and to undo) but isn't a progressive option.

If the chancellor is persuaded that the UK economy requires a US-style emergency stimulus then he will have to carefully balance the potential consequences of each option, and it may be that a combination of measures delivers the best outcome for the UK economy.

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