The Chancellor's new clothes

"But he hasn't got anything on", a little child said. – Hans Christian Andersen

There were few surprises in the Chancellor's first Budget: the media had been comprehensively briefed beforehand, and the initial market moves were modest. Gilt yields rose a little, but in line with rising yields across the rest of Europe. Stocks fell, but were actually outperforming weaker European markets. The pound was little changed.

The new Labour government, anxious to establish its financial credentials, will see this as a positive result. But any observers taking the UK's political discourse seriously will have been a bit bemused. Despite the very public measurings and fittings beforehand, the fiscal cloth revealed is unremarkable.

So, after all the talk of black holes and hairshirts, the reality is a net fiscal injection – that is, a modest net increase in borrowing relative to previous policies. It amounts to 0.9% of GDP in the current fiscal year, peaks at 1.4% in 2025-26, and then fades slowly to 1.1% in 2029-30.

And after all the talk of dire UK performance, and the need to rebuild a failing economy, hidden amongst the extensive fiscal embroidery is the absence of any strategy for boosting structural growth. The Green Paper on industrial policy will have to do a lot of work.

The biggest single components of the package are (1) a multi-year increase in planned government spending, peaking at 2.6% of GDP in 2028-29, mostly comprising current rather than capital outlays; and (2) an increase in employer national insurance contributions of around 0.8% of GDP. The widely-trailed increases in capital gains and inheritance tax, the abolition of non-domicile status, the ending of the winter fuel allowance, and the imposition of VAT to private school fees, were macroeconomically insignificant.

The altered presentation of the fiscal accounts to focus on the government's net financial liabilities was also widely-trailed, but is a little pointless. The additional borrowing which it is supposed to facilitate (in practice, we'd know about the assets whether they feature explicitly in the fiscal tables or not) is inconsequential in scale and could surely have been done at the same cost without changing the definition.

The new plans show both plain vanilla government net debt (the previous focus), and net financial liabilities, more or less flatlining at 97-98% and 83-84% of GDP respectively. The former ratio than is higher than had been projected under the previous government, but by 3-4 percentage points or so: the new profile is unlikely to trouble international capital markets, which are used to seeing (for example) the US, France, Italy and Japan carrying larger debt burdens.

The bottom line is a short-term stimulus to cyclical growth and inflation risk this year and next, which if anything slightly reduces the Bank of England's room to cut interest rates (and the Office for Budgetary Responsibility is predicting, on the back of the policy changes, slightly faster growth than the Bank has been). Business may benefit a little from the extra growth, but since it will be taxed a bit more heavily – and since most of the UK's big companies make their money outside the UK anyway – UK stocks are no more attractive than they were.