The old phrase is ‘It’s the economy, stupid!’ And in George Osborne’s second full budget, there was plenty to remind us that this saying still resonates. When the Chancellor’s self-avowedly independent Office for Budgetary Responsibility (OBR) made its first forecasts for UK economic growth in last year’s pre-budget forecast, GDP was meant to be 2.6% in 2011. In last year’s Budget itself, the forecast was downgraded to 2.3%. Yesterday’s 2011 Budget lowered this GDP projection yet again; this time to 1.7%.

Over less than one year, the OBR has produced forecasts which have seen expectations of GDP growth fall by almost a full percentage point. In the entire UK economy, which is worth in excess of £1,400 billion (see page 12 of this pdf), this is an error of approximately £14 billion; that’s more than one-third of the UK’s total annual defence budget. The margin for error in economic forecasting is often large, but the impact of those errors is also magnified by their effect on individuals and businesses, as well as on government budgets and credibility.

The Government is trying to bring the public deficit down and reduce the UK’s ‘debt burden’. It is accepted in mainstream UK politics that it is right to do so. The opposition merely argues that the pace of the deficit cuts should be slower, to allow full economic recovery to take hold. I have blogged about the likely dangers of this strategy before. It’s also important to note that there are alternative economic views out there on the need for deficits to be cut. But the central result of lower GDP growth is that just about every other indicator suffers as a consequence: the deficit itself, debt to GDP, government borrowing - all the things that we are meant to be concerned about – and, of course, unemployment and poverty.

The Government has said it wants the private sector to grow the economy out of recession. This budget shows how the Coalition believes this will happen: by encouraging big business to invest by cutting their tax burden. There are many examples of this strewn through the Budget document:

• Cut corporation tax immediately by 1% to 26%
• Reduce it to 23% by 2014
• Allow UK firms with financial HQs overseas to pay 5.75% corporation tax on profits
• Give further exemptions from tax on profits of foreign branches of UK firms

While there are some headline-grabbing measures such as the 1p cut in fuel duty and increases in tax allowances, the main strategy lies in making the UK a more competitive location for international business. This area of policy is now uppermost, with public spending on benefits, pensions and infrastructure strictly controlled. This will certainly be possible by uprating benefits in line with CPI not RPI inflation, as I noted the other day.

But in the end the bottom line is growth, without which benefits will rise anyway, as more households require them. Low or no growth also means higher unemployment, lower tax revenues and higher aggregate public spending. The Chancellor and his OBR think growth of 2.5%, 2.9% and 2.9% in the next three years will help him steer clear of policy failure. Others are less certain.