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Lord Willetts is President of the Resolution Foundation. He is a former Minister for Universities and Science.
Jeremy Hunt’s Budget is likely to have less drama than some recent ones and it will be none the worse for that.
The scenario he will wish to avoid above all is being blamed for a further rise in interest rates. This is not a Budget for gambling on a bit of extra borrowing. It is one for reinforcing the prudent messages of last Autumn. If anything, he will want to provide more evidence he is still taking measures to bring down public borrowing in the years ahead. The kind of measure which would demonstrate this long-term commitment would be further increases in the state pension age out beyond the end of this decade. Although pension age is not a legal retirement age, it would also reinforce a key theme of his Budget – the need for us to keep working for longer.
The short-term economic news is rather better than he might have feared last Autumn, with lower wholesale energy prices and slightly higher GDP. This may lower his public borrowing forecast for this year by £30 billion or so. But it is not the prelude to a better medium-term fiscal prospects, with growth not expected to be much better than expected.
Many Conservatives are uncomfortable with the Corporation Tax increases. There are even some who claim there is a Laffer Curve at work and lower rates brought in extra revenues – though a rise in revenues when rates were low was more due to a fall in business investment which could be offset against Corporation Tax. There will probably be some help on capital allowances to try to boost business investment which fell off a cliff in 2016, and has not increased since. But the reality is that Britain’s public borrowing needs to come down, and with higher interest rates, the budget line for servicing the National Debt has risen enormously.
The framework for this budget will be Rishi Sunak’s Mais lecture which rightly identified three key long term drivers of growth – innovation, infrastructure investment and skills. I hope there will be something in the Budget for all three. We have a great start-up culture in Britain, with early-stage grants and Angel investors. The problem is scaling up after that. That means more funding from pension funds and other investors. It also means more physical facilities shared across companies in a sector which do not have the resources of their own as they leave the research lab and move to prototyping at a scale below full-scale manufacturing.
Britain also needs more infrastructure investment. There have been reports in the last few days of a planned slow down in HS2 construction. It would be a pity if that were the whole story. Investment in local transport links – especially the connections getting more people from small towns into the nearest big city – makes a lot of sense, however unglamorous. Expanding the travel to work area is a great way to boost participation in the jobs market. That is likely to be a strong theme in the Budget. That is partly about getting people on the fringes of the labour market back into work. But it also means creating better incentives for people already in the jobs market to work longer hours.
There are design faults in Universal Credit which need to be tackled. It was very focused on workless households where there was nobody at work, but much less good at creating incentives for a second adult in a household to go into work. And its smooth tapers made it easier for people to lower their hours and not just increase them: there is a case for returning to the clear incentives to go above 16 and 30 hours in the old system.
That leads on to skills, where we must hope that the investment in green tech includes training people to make and install this kit. One reason why Britain is doing so badly on insulating houses or installing heat pumps is the lack of skilled workers. We are still slow to create training programmes and apprenticeship programmes for the jobs of the future.
The Chancellor will be hoping that the next few months sees some more modest optimism about improvements in our insipid growth rate and in the public finances. The Autumn Statement then could be an opportunity for a bit more boldness. Moreover, Britain’s fiscal rules are constructed very oddly, with a lot of focus on bringing down Government debt by the fifth year. By the Autumn, the fifth year will have rolled back and, if all else fails, that might give the Chancellor a bit more room for manoeuvre.