My column on The Budget. It was right for the Chancellor to focus on providing a stronger foundation
This column appeared on Conservative Home following the Budget.
The Chancellor was right to talk about an age of optimism. The clear message from this Budget is that the Government now needs to deliver upon pro-growth supply-side policies to help deliver it.
The good news is that the economy is recovering, public finances are improving and government borrowing is heading lower. It was also a Budget with a powerful message about the need to build a stronger economy, with a focus on innovation and investment.
The Chancellor described this Budget as being the foundation for stronger economic growth and sound public finances, yet he also said that credibility was built on what was done, not just on what was said. Therein lies his challenge.
The Chancellor’s desire is to reduce the size of the state and to cut taxes. Notably, he has recently raised taxes and the announcements in this Budget will prevent borrowing falling as much as it would have done. There was also a significant and welcome boost to departmental spending.
The immediate reaction to the Budget appears to have been a mix between positivity about such an accomplished performance and sensitivity about the high rate of tax and spend. Meanwhile, UK financial markets responded positively to news that future gilt issuance will be less than expected.
Yet, as we emerge from the pandemic, with many areas of the economy having been hit hard, it was right to focus on providing a stronger foundation for growth.
I am supportive of the 3.8 per cent per annum increase in departmental spending over this Parliament, showing that austerity is not a policy option, as reflected in a Policy Exchange report I co-authored last year, A Pro-Growth Economic Strategy.
While the economy and public finances may have turned the corner, both are still vulnerable to shocks, and this was reflected in the Chancellor’s focus on inflation so early on in his speech.
The current rise in inflation is unlikely to prove permanent, but it may persist for a year or two as opposed to passing-through quickly, not helped by the Bank of England’s stance to date.
The persistence of inflation not only threatens a squeeze on living standards, but also, as the Chancellor alluded to, adds to borrowing costs if interest rates or borrowing yields rise.
While the economic forecasts of the Official for Budget Responsibility (OBR) are outside the Chancellor’s control, they tie his hands on policy and can impact his judgment call on the fiscal measures. If the forecasts are too pessimistic, they imply a greater proportion of the deficit is structural, adding to pressure on the Chancellor to squeeze spending, or hike taxes, as he did recently.
A lesson of the last six months is an important one, namely that the margin of error on budget projections is high, and that stronger economic growth can allow the public finances to improve significantly.
Indeed, the deficit over the first half of this fiscal year is already £43 billion better than forecast in March. This should allow pushback against any consensus calls for higher future taxes, and it reinforces the need to help incentivise the private sector to deliver stronger, future growth.
There was confirmation of a strong rebound in the economy this year, returning to its pre-crisis level around the turn of the year, with growth of 6.5 per cent this year and 6.0 per cent next. The issue is what happens thereafter.
The OBR remains cautious about any post-Brext growth dividend and thus the challenge, perhaps, for future policy is to show that is not the case. Growth is expected to decelerate to 2.1 per cent in 2023, followed by 1.3 per cent (2024), 1.6 per cent (2025) and 1.7 per cent in 2026.
Taking pride of place has to be employment. The furlough scheme was expensive, at £69 billion, but it prevented unemployment from reaching anywhere near the rates once feared at the start of the pandemic. Unemployment, according to the official forecasts, will peak at 5.4 per cent, not the initial 12 per cent feared.
Against this backdrop, the Chancellor felt he had both the room and the need to intervene. The Budget Red Book pointed to a sizeable 65 policy decisions that contained an expenditure or tax implication, including the measures announced in recent weeks such as the health and social care levy. Perhaps this is too much intervention.
There were many welcome measures including the reduction to the taper on universal credit that helps those on low income and a reform from a complex to a simple taxation of spirits. The Budget also laid some of the groundwork for the key joint political and policy areas of the green agenda, levelling up and higher wages.
The latter included confirmation by the Chancellor of his pre-Budget announcement of an increase in the national living wage and other measures to help people through the current cost of living squeeze. This move, though, particularly in the wake of the hike in national insurance reinforces the need to reduce future business costs, including tax and regulations, particularly for small firms.
The Chancellor’s help given to the British Business Bank, while welcome, does not address the scale of the financing challenge facing many small firms. The failure to reform business rates today, plus delaying the commitment by two years to the £22 billion research and development spending target were disappointing.
The net result was that this was a generous Budget. There will be a net boost of £3 billion in 2021/22 and of £25.3 billion in 2022/23, with boosts in future years too.
The Chancellor announced two new fiscal rules. These usually do not stand the test of time, although on this occasion it was welcome that the focus was on reducing debt to GDP, gradually over time. that particular focus makes sense. Debt to GDP, after peaking at 98.2 per cent in 2021/22 is expected to fall to 88 per cent by 2026/27.
The Chancellor had no white rabbits to pull out of the hat. Thus, having borrowed, taxed and spent, the challenge for him and for th That means in coming years reforming the economy and lowering taxes to galvanise the private sector and help deliver stronger sustainable growth.e Government is that there is a need to help force through change.