Yet another botched Budget
Chancellor Jeremy Hunt did absolutely nothing to bolster the country’s productive potential, says Max King
The purpose of every Budget should be immutable: to enhance, through spending and taxation, the productive potential of the UK economy. This increases the trend rate of economic growth, thereby making people better off and raising extra revenue for the government, which in turn finances lower taxes and/or higher spending. The result should be increased popularity for the governing party.
The most pressing need is to encourage into work the 9.3 million people of working age (22% of the total number), a tally that has increased significantly since the pandemic despite widespread labour shortages. The stick for this strategy would be to freeze benefits of the 5.6 million claiming them for at least a year; the carrot would be to direct the consequent savings towards increasing the thresholds for tax and national insurance. Further savings would soon be gained from the increased numbers in work and the resulting benefit to their health.
The second major drag on the economy is the relentless slide in productivity in the NHS, which significant increases in expenditure have failed to prevent or even slow. Extra funds, it seems, have made the NHS careless in how it spends its money. The opposite approach – restricting new funds – needs to be applied. Other areas of government expenditure, such as education and defence, need the money more.
The third major problem is that energy bills are between a third and a half higher than in Europe, while the government impedes self-sufficiency by discouraging or preventing investment to exploit Britain’s hydrocarbon reserves. High energy prices subsidise renewable energy, on which the government has imposed a bizarre “windfall tax”. Energy policy encourages not self-sufficiency, but imports.
First do no harm
Fourthly, chancellors should avoid poorly thought out measures, such as the windfall tax on energy, the abolition of VAT refunds on goods bought by visitors (the “tourist tax”) and the abolition of nondomicile status for residents from overseas, which are economically damaging while raising scant revenue.
Unfortunately, the political pressure on chancellors is to cut taxes and increase spending to gain shortterm popularity while ignoring or contradicting the groundwork to make these measures sustainable. Such measures are usually “financed” by hair-brained tax increases that appeal to focus groups.
Even that was too much for Jeremy Hunt. The rate of employee national insurance was cut by 2%, but the benefit was negated by the ongoing freeze on tax thresholds. Hunt complained about the 6% fall in public-sector productivity since 2019, but still chose to throw more money at the public sector: a 1% increase in real terms, which is higher than the growth rate of the economy.
A “public-sector productivity plan” was announced with a £4.2bn “investment” to “improve publicservice delivery”, but this is just thinly disguised extra spending. The £3.4bn extra for the NHS for “new technology”, in addition to the £2.5bn of
“British pension funds are to be bullied into investing in the UK whether it benefits their members or not”
extra funding, is not conditional on productivity improvements, so there won’t be any.
The “British Isa” will attract a negligible amount of additional savings into British companies and is largely intended to distract attention from the absence of any real incentives to save. The opportunity to stimulate the UK’s stockmarket and attract capital into the UK has not been so much missed as snubbed.
UK pension funds are to be bullied into investing in the UK whether it benefits their members or not. Hunt allowed speculation about cuts to inheritance tax and other economically helpful measures with modest costs to spread, but then did nothing – perhaps because such measures would prejudice his chances of getting a peerage from a Labour government.
Initial commentaries on the Budget were undeservedly kind, as they focused on what was in it rather than what was left out. Budgets that look good the day after soon unravel and those attracting the most criticism come to be well regarded. Hunt’s Budget is likely neither to improve the productive potential of the economy, nor to bolster the government’s finances– or to enhance the popularity of the government.
At least Hunt ignored the siren calls for more public-sector investment. In theory, such investment in infrastructure could reduce economic bottlenecks and raise productivity, but in practice the UK’s experience of public-sector investment is grossly extravagant vanity projects, such as HS2, always late and always massively over budget. If the UK needs more infrastructure spending, which it does, it will have to go back to private finance initiatives or public-private partnerships: handing projects over as a profitable enterprise to the private sector.
The government will be poring over the media, the opinion polls and the focus groups’ responses for evidence that the Budget has gone down well. The bondmarket vigilantes, however, are sceptical. The yield on ten-year gilts has almost converged with ten-year US Treasuries, despite the contrast between near-recession in the UK and strong growth in the US.
This is not a paradox; the US is seeing strong productivity growth, but the UK isn’t. The political class is still in denial. Anyone thinking of going to work and live overseas for a few years should not be put off. This is a good time to go.