There has been the usual blizzard of commentary on last Wednesday’s Budget – most of it negative – which continued over the weekend. For chapter and miserable verse, try the IFS or the Resolution Foundation. This piece will reflect instead on three positives and offer a quick verdict on some of the individual announcements.
The first point is simply to make a positive out of a negative. Many people – myself included – described this as a ‘boring Budget’, or lacking ‘buzz’.
It was certainly a fiscal non-event in terms of its overall economic impact. The boost to demand from another 2p cut in National Insurance (NI) was mostly offset by a bitty package of small tax increases, resulting in a net stimulus of just a few billion pounds.
However, there was no need for a major fiscal boost. There is already some additional stimulus in place from the 2p cut in NI announced in the Autumn Statement, which came into effect in January. Poorer households will be helped by the large increases in benefits, the state pension, and the national minimum wage in April.
In the meantime, business and consumer confidence has already been recovering, and there are some early signs of a return to growth in the first quarter.
The more important point is therefore that a relatively ‘neutral’ Budget means that the Bank of England now has one less excuse to delay the much-needed cuts in interest rates.
Indeed, the OBR is now forecasting that headline inflation will fall below the Bank’s 2% target in the coming months (it should do so in April) and remain there or thereabouts for the remainder of the year (a more optimistic view than the Bank’s itself, but one with which I agree).
What’s more, this was based on the markets’ expectations in mid-February, which were for the Bank to cut interest rates to around 4% by the end of the year. That would be a much more favourable backdrop for an Autumn election.
The second positive in the Budget was a pragmatic approach to public spending. The Chancellor kept the existing projections for overall departmental spending, which are already tight (some would argue, unrealistically so), but with a renewed focus on boosting productivity in public services. The NHS rightly took centre stage on the same day that the Office for National Statistics revealed that staffing numbers in the health service have risen by more than a third since 2013.
The Chancellor’s stated aim is a ‘more productive state’ rather than a ‘bigger state’. In other words, doing more with about the same, and with what’s left to go on tax cuts. Any ambition for a ‘smaller state’ still seems to be wishful thinking. But there is at least some clear water here between Labour and the Conservatives.
This leads to the third positive – the cuts in National Insurance and the promise to do more here when the public finances allow. Among other advantages, cutting NI rather than income tax is more likely to encourage people back into work and therefore ease labour shortages.
The upshot is that while the overall tax burden is still set to rise (largely due to the ‘fiscal drag’ from the freezing of income tax allowances), it will at least do so at a slower pace, and with a gradual rebalancing away from a tax on work. This is probably the best that can be hoped for after the surge in public spending during the pandemic and then the energy crisis.
The Chancellor has therefore provided some positive narratives for the election campaign.
Communicating this will still be a huge challenge. Many opinion polls suggest that voters would prefer increases in public spending rather than further cuts in taxes. For example, YouGov’s post-Budget survey suggested that most Britons would prefer to spend the extra revenues from abolishing ‘non-dom’ status on NHS staff and free school breakfasts (as Labour intended), instead of reducing NI and extending child benefit (as Jeremy Hunt did).
Nonetheless, I would take all these polls with a large pinch of salt. People may well be reluctant to say (even in an anonymous survey) that the NHS or free school meals should not take priority, even if they would actually prefer lower tax bills.
These polls can also throw up some odd results. Another YouGov survey found a large majority in favour of cutting income tax rather than NI (by 55% to 10%), despite the compelling economic arguments the other way. I suspect this reflects the common myth that NI ‘pays’ for the NHS and the state pension.
Elsewhere in the Budget, there was a raft of smaller announcements, with a mix of measures that I liked, some that I didn’t, and those where the jury is still out.
The former included the reforms to the high-income child benefit charge (reducing the punitive marginal rates of tax faced by many families), and the reduction in the higher rate of capital gains tax on property (with a rare but welcome nod to the ‘Laffer curve’).
Those measures I didn’t like included yet another extension to the ‘Energy Profits Levy’ (you could just about make an economic case for a ‘windfall tax’ that is genuinely a one-off, but the repeated tweaking of the EPL will just add to business uncertainty), and the continuation of the freeze on fuel duty (it’s not obvious that motorists as a group need special help, though this measure will at least knock another 0.2 percentage points off headline inflation in April compare to the Bank’s forecast).
And those measures on which it is too soon to come to a verdict include the abolition of ‘non-dom’ status (which might raise a billion or two, but this is highly uncertain), and the proposals for an additional £5,000 ‘UK ISA’ (most people don’t use their existing £20,000 allowance, it’s not clear what a ‘UK-focused’ company is, and there will be a lot of deadweight as investors simply use the ISA to shield purchases that they would have made anyway).
Overall, there was nothing much in this Budget to move the dial either on the economy or the opinion polls. But the Chancellor did OK within the constraints set for him – including the self-imposed fiscal rules. As a result, the government should be able to fight the election on slightly better ground.
Plain-speaking Economics 