The only worse judgement about a Budget than a snap article is an opinion poll – and we write that regardless of the reception that polls gave last week’s.
For just as a snap view can be based on less than the full picture (a particular feature of Gordon Brown’s), so a polling one tells one nothing about whether a Budget will work, or indeed will be as popular a month after its release rather than a day after.
Our own snap take was largely restricted to asking whether the tax rises announced for future years will really happen at all – or whether Boris Johnson will be able to take advantages of higher revenues to cancel them, and then seek a quick general election.
The end of the week after the Budget may be a better time to take a fuller view. It would start by trying to understand the position that Rishi Sunak is in.
The post-Budget piece on this site by his Treasury colleague, John Glen, set out the scene as the Chancellor sees it in the latter’s first presentation since Brexit was done in full, and vaccines gave us hope that the pandemic will end.
The economy has shrunk by 10 per cent, the largest fall in over 300 years. And our borrowing is the highest it has been outside of wartime.
That suggests going for growth in the short-term, as this site has recommended, with fiscal consolidation taking place later, as it will have to do in spades if the growth doesn’t come. The timing of Rishi Sunak’s measures suggest that he agrees.
We believe that tax rises inevitably have to play some part in that consolidation along with spending cuts, and recognise that the run-up to an election is a difficult time to do either: the Chancellor is cursed by the economic and electoral cycles being out of kilter.
Certainly, government will always have to tax something to pay for public services, and the sensible view is that that something should be spending rather than income (or business).
Which explains why early Thatcher and Osborne budgets alike put up VAT, and why the latter wanted two new council tax bands on more expensive properties – as he confirmed to ConHome last year.
However, Sunak is boxed in on VAT. The final headline pledge of the last Conservative Manifesto was “we will not raise the rate of income tax, VAT or National Insurance”.
We may know more about his plans for property taxes if any on tax day, March 23rd. There is a plan on the table to replace council tax (and stamp duty) with a new property tax, but it is revenue neutral.
Since it would already create losers in more expensive properties in London, Sunak is unlikely to adapt it to create even more of them there and elsewhere.
Business rates were a dog that didn’t bark during the Budget, and any eventual reduction to them looks to come largely from a digital sales tax, not a residential property tax. Some who would pay it belong to an interest group with little direct leverage: foreign companies.
But unable to turn to VAT and unwilling to turn to property – or so it appears – Sunak targeted income tax allowances and business in his Budget, via corporation tax (assuming, as we say, that these hikes ever happen at all).
On the first, the Office for Budget Responsibility says that the allowances freeze will haul a million more people into the higher rate band. Fiscal drag is scarcely new – as the Institute for Fiscal Studies noted two years ago – but the move will do nothing to improve incentives.
On the second, there are some detailed arguments for the increase, as set out by Anthony Browne on ConservativeHome recently, but a general one against, which is based on certainty.
In essence, lower rates of corporation tax have been a feature of Conservative policy from Thatcher through to Osborne and beyond – together with an emphasis on lower income tax rates, supply side reform and a smaller state.
If these higher ones ever come in, the Chancellor will essentially be trading off higher corporation tax from some companies for the new super deduction for some companies.
That would mean a shift from a relatively simple and neutral system to a more complex and partial one, which would be more likely to help firms in the Midlands and North, according to sources that this site has spoken to.
We are not convinced that such a switch, if it ever happens, is a net plus for Britain. But now that Sunak has turned on the super deduction it would be best for him, in order to help provide that certainty, not to turn it off in two years.
Elsewhere, those Thatcher-to-Osborne orthodoxies are also in flux. They were first challenged in recent times not by Johnson, but by Theresa May, with her mantra of “the good that government can do”.
The Industrial Strategy was a product of her approach. We are all for one in principle if it has a clear aim, namely turning pure research into translational research.
As Greg Clark, who had charge of it under May, conceded yesterday on this site: “it may have tried to do too much in one White Paper”. His successor, in his swashbuckling way, dismissed in the Commons this week as “a pudding with no theme”.
That directness is a part of what makes Kwasi Kwarteng such an engaging politician, and it may be that he plans a slimming down of the strategy that will deliver results.
But one source close to the process worries that “individual policies will continue anyway but without consistency, ownership or scrutiny”. And Clark has a point when he says that any strategy must be linked to place as well as sector – in other words, to levelling up.
We’re concerned that the Government has come to see such levelling up as incompatible with supply side reform and institutional change. We can’t see much of the former in Build Back Better – the Government’s “plan for growth”.
It’s big on intrastructure and net zero; smaller on skills and innovation: as May said in the Commons this week, there’s a limit to how many times Ministers can review research and development tax credits.
If it really wants to go for sustainable and more even growth, the Government will need to devolve more power. As a former senior Minister put it to ConHome recently: “we can’t deliver levelling up, a skills revolution, an industrial strategy and zero carbon from the centre”
“The new mayors have a convening power: they can get local businesses, the Chief Constable, the NHS bigwigs, the university vice-chancellors, the local enteprise partnerships round the table, and come up with a plan.”
On supply side reform, we understand why Kwarteng killed a planned review of workers’ rights. But what is the plan to ease supply elsewhere – especially on housing?
On institutional change, there are commitments to reform the civil service and the courts, but almost none that apply to the major public services, especially health.
To date, tax rises are taking the strain of future consolidation, and the danger for the Chancellor is that he finds himself boxed into that position permanently – with Downing Street spooked by the consequences of a proper spending review for Tory red wall seats.
The Budget promises infrastructure spending, possible tax rises, pots of money from the centre for those provincial seats, limited localism, plus some levelling-up but little reform. That’s a mix of pluses and minuses, but not a plan for growth.