A health warning: this Budget will be boring. Our exciting six-month game of “who’s Chancellor today?” is over. Barring an accident or alien invasion, Jeremy Hunt will be waving the red briefcase come March 15th.
But a certainty of personnel is not the only thing leaving this Budget duller than most. The Chancellor is constrained by a fiscal straitjacket of a tightness hitherto familiar only to Hannibal Lecter.
These restraints are both political, and economic. Since both Hunt and Rishi Sunak owe their leases on Downing Street to their predecessors’ follies, our new Stanley Baldwin and Neville Chamberlain live by pledging “safety first” – and make every move with one eye on the bond markets.
Hunt will be making the speech, but he shares this Budget’s authorship. The Treasury provided all of Sunak’s previous Cabinet experience. Being Nigel Lawson with a Peloton, he knows the “only way to substantial, lasting reductions in taxation” is “to tackle inflation” and “an out-of-control public sector borrowing requirement” – and “that this formula [is] an election-winning one”.
In the short term: get inflation down, swerve a recession, and hope the public finances are fit enough by the Autumn to float a tax cut or two. For beyond that, please consult the Oracle of Sunakism: last February’s Mais lecture. It was here that the Prime Minister called for a new “culture of enterprise” and blamed our anemic growth on a failure by businesses to invest.
This suggests no major changes on tax and spending next week: another dose of medicine ahead of jam tomorrow. Sunak and Hunt’s problem is that a holding pattern Budget is not a treatment some of their backbenchers are willing to swallow.
Taxes are at a 70-year high. Frozen thresholds drag ever more into higher bands. The siren call of Trussonomics still rings out to true believers. Being refused tax cuts will be as welcome to some Tory MPs as Kwasi Kwarteng at a pension fund’s Christmas party.
The same old song starts up: the economy is outperforming the Office for Budget Responsibility’s (OBR’s) predictions. The public sector borrowed £30.6 billion less than forecast in the year to January. The £7 billion increase in the deficit is far below the £44 billion predicted in November. Congratulations! We are not doing quite as badly as we thought we would.
Come back Truss, all is forgiven? Not quite. The ‘windfall’ was based on better-than-expected returns for self-assessed tax receipts. Government debt is still at 99 per cent of GDP. We will still be paying around £120 billion on debt interest this year. Government spending is still running £20 billion ahead of last January, primarily due to the cost of Truss’s Energy Price Guarantee (EPG).
Of course, a mild winter and a successful push to reduce reliance upon Russian gas have stopped the EPG from being the most expensive piece of public spending in peacetime. Falling energy costs were also central to the avoidance of a recession in December.
Hunt announced in the Autumn that the EPG would lift from £2,500 to £3,000 in April. Its cost is now expected to be around £26 billion – £11 billion less than predicted, although falling windfall tax receipts leave Hunt with only around £4 billion more to spend. Extending the EPG would cost £3 billion, as the price cap is expected to soon fall below the £3,000 threshold.
Sunak, unlike Truss, preferred targeting help on the worst off. But preventing price rises could be sold as a contribution to the Government’s efforts to halve inflation. A bankable win. Going beyond it crashes against the familiar obstacles of a rocky economy and Tory MPs.
Quietly, bond yields have returned to a similar level as before the mini-Budget, primarily due to fiscal tightening. Whilst the OBR may provide Hunt with better figures for 2023 than they did last November – when their calculations were drawn up in the mini-Budget’s aftermath – they are expected to downgrade growth estimates for 2025 through 2027.
Crucially, this makes it harder for Hunt to stick to his aim of having debt fall as a percentage of GDP within the next five years. Any tax cuts – unless they can be proved to the OBR to encourage higher revenues since they do dynamic modelling – must therefore be balanced by spending cuts. Unless, of course, Tory MPs discover a new enthusiasm for housebuilding and higher immigration.
With him lacking headroom, the places Hunt will likely spend the available cash are clear. Ben Wallace has halved his demands for another £10 billion for the Ministry of Defence. A funding increase is required to help his department stand still against inflation, aid for Ukraine, and the darkening global outlook. Unfortunately, its spending remains a Whitehall joke.
Other spending commitments include a continued freeze of fuel duty – expected to cost £6 billion – and increases to public sector pay. Current budgets allow for 3.5 per cent. 5 per cent would cost £4 billion; backdating it, even more. Is that the cost of quieting the unions – or a wage-price spiral? Reports suggest Hunt does not overly fear the latter.
Also expect a nod toward the Government’s efforts to reverse the recent 830,000 person rise in economic inactivity. 2.5 million are not working due to illness; a further 1.7 million are staying home to child rear. Hunt and Mel Stride have been seeing how the issuing of sick notes and benefits to parents can be changed to make working easier.
But only the unlikely trifecta of serious childcare reform, a house price crash penalising early retirees, and a clearing of the NHS backlogs are going to shift numbers to any great extent. Neither does a change look likely to the other spectre haunting this Budget: the corporation tax hike from 19 to 25 per cent, and the end of Sunak’s super-deduction.
When Sunak announced the rise in 2021, it had a clear logic. The pandemic had to be paid for. Plans were in place for a global minimum rate. He had never been convinced that George Osborne’s cuts justified squeezing investment allowances. So, he bit the bullet.
He had planned some carrots with the stick. During the pandemic, Sunak introduced his super-deduction, which helped companies to recoup their spending on capital investments. Sunak floated the need for a permanent alternative in his Mais lecture. But Putin’s invasion began the same day he spoke.
Since then: inflation, huge American subsidies, cancellation of other tax rises, the Trussonomics panic. Going from having the 10th most competitive business tax regime in the developed world to the 33rd is the price Sunak and Hunt find themselves paying to keep the finances in check, especially as continuing the super-deduction would cost £25 billion a year.
This must sit uneasily with a Prime Minister desperate to increase investment and a Chancellor who twice ran for the leadership calling for Corporation Tax cuts. Unsurprisingly, the Bank of England predicts it will hit investment and growth rates over the next decade. It is, in one ex-Cabinet minister’s words to me, “categorically the wrong decision”.
But the question for MPs remains the same. You don’t want this. Hunt and Sunak don’t want this. Businesses don’t want it. So: what will you cut (casting a covetous eye at the Triple Lock)? Or – what other taxes will you raise? Or – heaven forbid – what will you build? After all, as someone once said, “the number one problem in this country, which everyone is feeling, is a lack of economic growth.”
We know where that can be gotten. And so the 1947 Town and Country Planning Act must be destroyed.