On Wednesday Rishi Sunak will announce a one-year Spending Review for 2021-22. This will not be a full Budget, but there is still a huge amount of mostly unhelpful speculation about what might be in it, and what’s coming next. There does at seem to be a broad consensus that the Chancellor should ‘go for growth’. Here are half a dozen tips.
It’s important to start by challenging the assumption that the key to a strong recovery is even more state intervention. It was right for the government to step up when it was the government itself that had shut down large parts of the economy. But the resurgence in activity over the summer shows the potential for growth to rebound of its own accord, as and when the brakes are taken off.
In the meantime, the Treasury and Bank of England have already provided an unprecedented amount of fiscal and monetary stimulus – gaining praise from the IMF for ‘one of the best examples of coordinated action globally’. This has helped to keep unemployment relatively low, minimising the risk of long-term economic scarring.
The first three tips are therefore actions to avoid that might undo the good work that has been done.
First, do no harm. This means stop frightening people with dire warnings of the need to ‘prepare for tax rises’ any time soon. By the way, how should we prepare, exactly? By saving more and spending less? Dumping assets? Scaling back investment plans? Not starting that new business? Emigrating…? How is any of this useful?
It also means avoiding the temptation to penny-pinch. The government was already spending about £900 billion a year before the pandemic struck and could surely make large savings by pulling back from areas where private markets can do the job at least as well. But these are big decisions for the longer term; piecemeal cuts in public spending now could simply hold back the recovery.
Second, avoid gimmicks. This may be difficult for a Chancellor with a strong personal brand and an eye for a photo opportunity, and a boss who likes writing big cheques. But next time somebody suggests a wheeze like ‘Eat Out to Help Out’, I’d politely show them the door.
Third, let the economy adapt. The pandemic is a health crisis above all else, but it does at least have the potential to transform productivity. We already seeing the acceleration of trends driven by technological innovation and more flexible working practices. The government should welcome these changes, rather than hold back the development of the digital economy, or penalise homeworking.
More positively, there are a number of things that government should be doing.
Fourth, make the most of low interest rates. The UK Debt Management Office could do even more to lengthen the average maturity of government borrowing and lock in these low rates. Now might also a good time to increase public investment in infrastructure, but only where these projects make sense on their own merits. Central government has a poor track record here and some aspects of the response to the pandemic have underlined just how badly Whitehall can spend our money.
Fifth, and more importantly, encourage investment and job creation in the private sector. It is crucial to resist calls to increase the burden of tax and regulation on businesses, especially as this burden is ultimately borne by ordinary people anyway. Better options here include the ‘full expensing’ of investment, allowing more businesses to offset capital spending against tax; the extension of Covid tax cuts, notably the stamp duty holiday and the VAT reduction for hospitality; and accelerating planning reforms to liberate private-sector housebuilding.
Sixth, and finally, get Brexit done. It may well be better to exit the transition period with a fair and balanced trade agreement in place. But ‘deal’ or ‘no deal’, it is important to end the uncertainty that has undermined confidence and temporarily held back investment. The government should take confidence from surveys showing the continued attractiveness of the UK as a destination for investment in the longer term, and the fact that the City is still Europe’s dominant financial centre – by far.
In short, the Chancellor should not have to do much more to boost growth and secure a strong economic recovery. If anything, he should now try to get out of the way.
This article was first published online by the Daily Telegraph (23rd November)