The revisions made to the Office for Budgetary Responsibility's growth projections, released to coincide with today's Budget Statement, are in a downward direction, with 2011 growth now anticipated to be 1.7%. This still looks a touch optimistic.

The Chancellor of the Exchequer described his Budget as a Budget to fuel growth, but beneath the hype there does not appear to be much fuel in the tank. To some extent this is unsurprising as the Chancellor has already used the Comprehensive Spending Review to tie his own hands. Even so, further - and more accelerated - redistribution towards those on lower incomes would have done at least something to improve the multiplier effect of what measures are in place to support the economy. The £600 rise in the personal allowance on income taxation does not kick in until April of next year - too little and too late to help an economy that is shrinking now. And a shrinking economy makes it all the more difficult for the government to meet its targets with the public finances.

The Budget has been accompanied by something called a 'Plan for Growth'. This aims to increase the competitiveness of the tax system, to encourage the creation and development of businesses, to rebalance the economy through investment and export activity, and to provide a more educated workforce. The headline ambitions suggest that the government's aim is to produce a raft of microeconomic policies that could help improve competitiveness and hence provide the right context within which economic growth can take place. So far, so worthy.

When we turn to the detail of the Plan for Growth, remarkably little involves a financial commitment by the government. There is reference to an additional £100 million to repair potholes, and one or two other things. But the (uncosted) words 'encourage', 'support', and references to reducing 'burdens' occur frequently. In other words, it's a 'do it yourself' plan for growth - much as the expenditure cuts were a 'do it yourself' exercise (a huge proportion of these cuts being shifted onto local authorities). The plan - inasmuch as it is a plan rather than a hope - is for a Thatcherian resurgence in enterpreneurship. We should wish for this to be successful. Whether or not it will be so will depend in large measure on the detail of the microeconomic policies that are introduced. And for that, we'll have to wait and see.

This week's budget needs to include policies aimed at the promotion of growth. There is a wide range of options open to the government, but one that is in line with the policies of one of the coalition partners (the Liberal Democrats) would be to raise the personal allowance (or 'disregard') on income tax. For the coming year this is set to be £7475. A substantial increase in this would raise disposable incomes - especially those of the people on the lowest incomes. Since the latter group tend to spend the largest proportion of their incomes, the knock-on ('multiplier') effects of raising their disposable income is likely to be greater than that associated with raising the incomes of other workers.

Ultimately the Liberal Democrats want to raise the personal allowance to £10000. While their more hawkish partners in government are unlikely to want to go the whole hog at this stage, it is, of course, now that the stimulus is most needed. Tax revenues fall when the economy contracts, and - while borrowing fell over most of last year while the economy was starting to recover - the more recent stagnation is doing nothing to help the public finances. Moving most of the way to the £10000 target - in a budget containing other policies to encourage growth - would be prudent.

Consumer confidence has, according to the Nationwide's monthly survey, hit an all time low. What is particularly worrying about these figures is that consumer confidence has a track record as a very good leading indicator of the state of the economy. Confidence has clearly not been helped by the government's failure, thus far, to deliver any clear plan for growth. While the hope is often expressed that the private sector will expand to soak up the supply of labour that is shed by public organisations, this has, so far, been just that - a hope. The reality has been one of rising unemployment - with the number unemployed rising to 2.53 million in January, the highest figure for some 17 years. Meanwhile, the OECD has provided a downbeat assessment of the UK's growth prospects over the next 2 years. This anticipates growth of just 1.5 per cent this year. The OECD does deem fiscal consolidation to be 'necessary', but also describes the government's plans in this area as 'ambitious'.

Next week's budget needs to provide what has heretofore been lacking - not just a hope, not just a promise, but robust government support for growth. And if that means trimming the ambition just a little, and losing face just a little, then so be it.

There are some very pertinent observations about the future development of macroeconomics in this talk by Olivier Blanchard.

His nine points are:

1. In the wake of the crisis, policy making has to change, in particular with less of a focus on a single policy goal.
2. The pendulum has swung, some at least, in the direction of a recognition of an enhanced role for the state in macroeconomic regulation.
3. We previously underestimated the impact on the macroeconomy of microeconomic distortions.
4. There exists a multiplicity of macroeconomic policy tools...
5. .... not all of which are fully understood.
6. Some of these tools are difficult to employ for reasons of political economy.
7. The future research agenda for macroeconomics, with solid microfoundations, is exciting.
8. There should exist a multiplicity of policy goals. But moving from a model of inflation targeting to one where multiple goals are targeted is difficult.
9. We should not hope for too much.

Recent developments in macroeconomics have focused on models based on dynamic stochastic general equilibrium (DSGE). These models are characterised by a set of macroeconomic relationships which are built up from consistent microeconomic foundations. Their microeconomic underpinnings are intended to finesse the criticism raised by Lucas that changes in policy beget changes in the behaviour of microeconomic agents thereby posing a challenge to economic forecasters. DSGE models come in a variety of flavours - there are classical models developed from the real business cycle literature and there are Keynesian models which build in price rigidity as an institutional feature. The models take the assumption of rational expectations as given. Large scale variants of these models are used as a tool for policy making and evaluation in central banks.

In recent work, Georg Weizsäcker has produced compelling evidence that - contrary to much of the economic orthodoxy of the last 40 years - people do not form their expectations rationally. It takes particularly strong evidence to disturb someone's expectation away from their prior beliefs. If the expectations formed by an agent are approximately correct, they will not adjust them rationally. Only if they are way out will they take new evidence on board.

Weizsäcker's findings should not be particularly surprising. They suggest that a way forward in modelling may be to adopt a nonlinear approach wherein the degree of rationality used in forming expectations varies inversely with the accuracy of those expectations. Given the evidence, it is clear that our models would benefit by admitting some sort of learning mechanism - something more refined than the assumption that we always achieve rationality.

Weizsäcker, G. (2010). Do We Follow Others when We Should? A Simple Test of Rational Expectations American Economic Review, 100 (5), 2340-2360 DOI: 10.1257/aer.100.5.2340

In recent work, Atish Ghosh, Enrique Mendoza and Jonathan Ostry have developed a means of evaluating the 'fiscal space' of an economy. This is a measure of the flexibiltity that the authorities have to engage in expansionary fiscal policies given the levels of national debt. The measure is calculated by reference to the maximum level of national debt that (given that interest payments need to be made on the debt) is sustainable at the economy's GDP. If the national debt were to rise above this point, then interest payments will serve to ensure that it would rise forever more, and so default would become inevitable.

The results are instructive. Unsurprisingly, Iceland, Greece and Portugal are amongst the countries with very little headroom. Italy and Japan are also in this group. Spain and Ireland (surprisingly, perhaps), are somewhat better placed. The UK is (perhaps also surprisingly) in a relatively comfortable zone, keeping company with countries such as France and Germany.

Results from the new panel dataset, Understanding Society, have been reported today, suggesting that people in the UK remained broadly optimistic at the height of the recession in 2009. At times like these, good news is always welcome. It is important, however, to note that this is a snapshot. Evidence from another source - the Nationwide survey of consumer confidence - confirms that confidence did indeed recover well during 2009. Indeed by the end of that year, confidence was not far below the levels realised in the summer of 2007, before the first signs of the credit crunch became fully apparent. However, since the end of 2009, confidence has plummeted once more and the Nationwide's index is currently close to the minimum value that it realised at the end of 2008.

The world moves fast. Understanding Society is set to be a fantastic source of data for researchers, but when analysing data we should pick horses for courses. Understanding Society is simply not up to date enough to provide useful information about consumer sentiment now.