The classic test of Budgets in these tough economic times is whether they’ll help with growth. On these terms George Osborne and the government get a mixed score for the measures announced yesterday.

Reducing corporation tax to 24% next month, increasing the personal allowance to £9,205 and reducing the top rate of tax to 45p are the key tax changes that will help with growth.

On the supply side both liberalising Sunday trading laws for a time and relaxing planning rules will make it easier for businesses. Regionalising public sector pay could also be a powerful tool for helping rebuild a thriving private sector in the regions.

On the other hand, complicating matters with a raft of minor tax reliefs and interventions for groups that lobbied for special treatment will be counterproductive. And introducing stamp duty of 7% on houses over £2m will deter talent coming from overseas.

Disappointingly, the other key measure the government has at its disposal for increasing growth – reducing the size and scope of the state – has not been touched.  The government is reducing spending from what was around 47% of GDP when they took office to 43% next year down to close to 39% by 2016/17. This only returns it though to around the same level as 2003. At these levels the state still requires high taxes to fund it and inevitably squeezes out the private sector. Though politically it may be difficult to announce another round of sweeping cuts, reducing the size of the state further would help boost growth.

Osborne should be looking for other additional areas where he can cut spending, and perhaps encouraging government departments to get on with these quietly behind the scenes could be a way through. If government departments came in with spending below the targets they have been set, that would help with growth in the medium term and would provide the capacity for substantial and funded tax cuts in the next budget.

Ultimately though context has perhaps never mattered so much. Osborne can do his best and he could certainly be doing more, but with oil prices and the state of the eurozone beyond Britain’s control and with entrenched problems of welfare dependency and public debt, we need to be realistic about how much one Budget can achieve.

Ruth Porter is communications director at the Institute of Economic Affairs

Tags: Budget 2012