Seize the Initiative! A Bolder Vision for the Budget? - POLITEIA
Published originally on the 26th October 2018 and written for POLITEIA
The original article can be read here.
The Chancellor has succeeded in playing down expectations ahead of this Budget. This looks set to be a holding Budget, with no major policy changes announced. But is that the right approach to take?
Of course, the aftermath of the global financial crisis has left its mark. Since then the trend rate of UK growth has been revised down significantly.
But since the Referendum it has become clear that more vision is needed about the opportunities that lie ahead and how the UK should position itself to take advantage of them. The tone certainly should be pro-business, aimed at creating an enabling environment that encourages investment and innovation. While there has been some of this, perhaps the approach is too cautious.
Besides the desire to leave the EU, the Referendum highlighted the need for a more pro-active domestic policy to address many economic imbalances.
Budget deficit improving
The good news is that the budget deficit is on an improving trend. That has been a positive about the budget deficit for some time and it should be emphasised that the current backdrop provides a powerful dynamic in which the budget deficit can fall more than expected. This is happening. The deficit in the first half of this fiscal year was £19.9 billion, £10.7 billion less than a year earlier and the lowest since 2002. This improvement in the public finances gives the Chancellor significant room for manoeuvre in this Budget.
Though the Chancellor says he is committed to cutting taxes and the Prime Minister has said austerity is over, it is tempting to say one needs to watch what they do. Ending austerity should mean ending the squeeze on departmental budgets. Therein lies the challenge. It should not mean hiking taxes to fund increased government spending. Nor should it mean sacrificing capital investment for current spending. With low borrowing yields there has been a case to fund capital investment, which is happening. In this Budget the Chancellor is expected to outline the likely growth in public spending in coming years, with full details unveiled in the forthcoming Comprehensive Spending Review.
In fact a more active fiscal stance should have a strong supply side focus to it, helped by tax cuts – and easing the regulatory burden on small firms. That is needed.
Given this, the main focus on Monday is likely to be on how the Chancellor plans to fund the Government’s future spending increase on the NHS. The Government has committed to boost spending on the NHS, by £20.5 billion by 2023-24. The options are:
– raise taxes, which is not my preference, given the tax take is already high and the disincentives associated with many possible tax changes
– to cut spending in other others where spending plans are not protected, but this is difficult given the squeeze that has already taken place and is not our preference;
– or, my preferred option, which is to recognise that public finances have passed a turning point, are on an improving trend and that this should continue with a steady future economic performance and higher tax revenues. And this allows the Chancellor scope to outline credible medium term fiscal plans without having to hike taxes.
Not a Brexit Budget
Brexit is a great opportunity. It is not, as the Chancellor seem to think, about making the best of a bad job. Apart from a relatively small amount that has been set aside to prepare for leaving the EU, Brexit has not figured prominently in the Budgets since the June 2016 Referendum and that is likely to be the same again this time. To make a success of Brexit the UK needs not only a good future relationship with the rest of the EU but also needs to position itself globally and have a domestic economic agenda that delivers strong future growth. Thus, this will not be a Budget aimed at preparing the economy for Brexit.
Fiscal policy, naturally, has a strong role to play in the post Brexit world. For now, any post Brexit focus in fiscal policy will have to wait until the landscape becomes clearer. In the event of a no-deal one would expect a major fiscal boost. In the event of a Withdrawal Agreement being signed the focus would then be on the details of the future relationship – and here one issue would be whether or not the UK retains maximum flexibility for future tax and regulatory policy.
Although Brexit will not be centre-stage it has already had an impact on the economic picture and thus on the fiscal landscape in the last two years. Growth has been steady. Employment is at a record high. The latter in particular has defied the predictions of Project Fear. However, some investment plans have clearly been impacted and held back by the uncertainty, and thus the economy is probably about 1% smaller than it might otherwise have been. But once there is clarity about what lies ahead, we would agree with the Chancellor that there would then be a rebound in investment plans. This, plus wage growth rising in excess of inflation should boost spending.
Ahead of the Budget the Treasury has come under pressure to unveil the analysis behind their assessment of a No Deal. They haven’t and this is a great disappointment. Openness and transparency are to be encouraged. And instead of a repeat of Project Fear there needs to be a greater debate about the economic consequences of a No Deal.
Key will be the growth projections. In the spring of this year the official forecast was for UK growth of 1.5% in 2018 followed by 1.3% in 2019 and 2020, rising to 1.4% in 2021 and 1.5% in 2022. Inflation was expected to decelerate towards its 2% inflation target over the coming year, with wage growth outstripping inflation. These figures may be tweaked, but more so for 2018 and 2019 than further ahead.
The economic picture for most economies in Western Europe, including the UK, is low growth, low inflation and low interest rates. The challenge is to break out of this.
The approach President Trump has opted for is pro-cyclical fiscal policy driven by tax cuts. That is not the approach the UK is opting for. In turn, interest rates here, while set to rise, will only do so gradually and look set to stay relatively low.
There are considerable near term challenges but many longer term opportunities too. It is not just leaving the EU that is key, it is what you do when you do when you leave. That requires seizing the initiative. Monday would be a good time to start.