This was a bolder Budget than many realise
Yesterday’s Budget inevitably reminded me of my own in 1992, delivered a few days before an election was declared. Jeremy Hunt was not quite in the same situation, but the political pressures were there, and the nearness of the election on everyone’s mind. In my Budget I made some modest tax reductions but tried to point the way to the issues in the election. Hunt had a similar task.
In the event, the Chancellor did pretty well: both politically and delivering a responsible Budget.
The problem for the Chancellor was that according to the OBR he had little scope for giveaways, whether increased public expenditure or tax cuts. This does not deter his own MPS – many of whom have their feet firmly in the air.
The OBR had revised the headroom of the Chancellor sharply down from where it was a few months ago, so Hunt could not do more than take 2p of National Insurance Contributions (NIC) for the second time in a year. Many Conservative MPS would have preferred a penny off income tax, but this would have cost £7billion for each 1p compared with £5billion for 1p off NIC. An alternative would have been to increase tax thresholds, but this too would have been prohibitively expensive.
His NIC reductions did not leave the Chancellor room for doing much else. Yet he managed to announce help for the creative industries, improved incentives for investment, and Levelling Up measures. He also continued with his fuel duty freeze and the cut in duty, which had to be paid for.
It was for this reason that Hunt had to go down the root of abolishing the current tax system for non-doms, getting rid of the outdated concept of “domicile”. He revealed, quite accurately, that Nigel Lawson – the great tax-cutting Chancellor – had also wanted to abolish the concept of “domicile” and regarded its abolition as tax reform. Certainly the concept of “domicile” is unique to Britain. While we have to be careful we do not deter wealthy foreigners from coming to the UK, that can be done with a simpler and fairer residency-based system.
Part of the Budget some Labour MPS might have been waiting for, but which was conspicuously missing, were increases in overall public spending and departmental spending. The Chancellor did not announce any extra resources for public spending and left the increases in departmental Budgets at 1 per cent per annum real. This was the same figure that the OBR had described as a work of fiction and which many thought was unrealistic. The Chancellor was thus, possibly, leaving himself open to the accusation that his tax cuts were being financed by unrealistic figures for spending.
The Chancellor’s answer was to say that what Conservatives wanted was not a bigger state but a more productive state. He pointed out that productivity in the private sector is now above its pre-pandemic level, but in the public sector it is still below. As he said, the public are getting fed up with extra costs with no improvement in services.
The Chancellor, therefore – in an important innovation – proposed a productivity plan for the NHS and other public services. He proposed that the NHS should be given £3.4billion to be spent on improving productivity. AI was to be used to cut down form filling by doctors. The digitisation of theatre processes, he argued, could produce an extra 200,000 operations a year. The plan, thus, could unlock £35billion of savings in the NHS – that is, 10 times the £3.4billion. The OBR also said a 5 per cent increase across the public sector in productivity would be the equivalent of £20billion in extra funding.
All this sounded like a genuine and serious attempt to come to grips with the problems of inefficiency in the public sector. The Chancellor deserves credit for the innovation and for addressing the problem.
Hunt has ultimately delivered a Budget that squares with his own fiscal rules and has been validated by the OBR. Conservative MPS may be fed up with OBR, but it does add credibility to the Government and its spending plans. We learnt in the Truss premiership that it cannot be ignored.
Yes, growth may be low compared with the past, but it is low across Europe. I see no reason why our growth will not speed up. It’s often forgotten that growth is the natural state of economies most of the time.
Hunt is not a conjurer or a magician – he is only the Chancellor. He cannot change the political weather overnight. But he has left Labour in a difficult position and pointed the way to an election. By sticking to tight public spending plans while delivering tax cuts, Hunt was delivering a challenge. Labour have ruled out tax rises, but if they are going to increase spending on the NHS, housing, and education, where are they going to find the money? They either have to accept the Government’s spending plans, or increase taxation. It’s that simple.