UK Budget on unsustainable course

We should perhaps be more worried about what the Chancellor does not say, than what he does, writes Bill Jamieson

They went to bed with Boris. Now they awake with Corbyn. Such is the growing grumble on Conservative backbenches as the new Chancellor Rishi Sunak prepares for his Budget in two weeks.

It’s not just the well-aired spending splurge for which they are braced, but the likelihood of tax rises over the next two years to stay within the government’s rules on borrowing.

It seemed only yesterday that the airwaves hummed with spending promises. These ranged through extra funding for the NHS, social care and schools, to ambitious infrastructure projects – with that cherry-topping commitment to the £100 billion-plus HS2 project on top.

Just a few weeks ago, the incoming chancellor could count on a gathering pace of economic recovery to lift tax revenues and help rescue the Budget arithmetic. He offered the prospect of a radical new broom. But instead, the brush is already looking threadbare.

With council tax set to rise on average by 4 per cent on 2020-21, Mr Sunak, already besieged by spending lobbies urging more money for high street rejuvenation and flood prevention, looks stymied.

The Conservative election manifesto said the government would not put up income tax, national insurance or VAT. That leaves the alternative of loosening the fiscal rules – but that would see the credibility of the new chancellor crippled from the start.

To abandon debt and borrowing targets midway through an administration is embarrassment enough. To ditch them before the first budget is even presented does nothing for confidence. The alternatives – ending the freeze on fuel duty, for example, to raise £4 billion – risk widespread opposition, while proposals such as a mansion tax will anger the more wellheeled Tory supporters.

Meanwhile, the hit to global business from the coronavirus epidemic has put prospects of a gathering upturn in jeopardy. Instead of the ‘Boris bounce’, the UK will be lucky to avoid a fall in GDP over the first and second quarters as supply chains are disrupted, vital assembly parts delayed and business travel plans cancelled.

The epidemic and its economic consequences may work to strengthen the case for immediate and substantial government spending. But this would pile on the pressure for tax increases down the line.

Mr Sunak has inherited a fiscal target from his predecessor Sajid Javid to bring spending into balance by 2022. But a report this week has brought a warning from the Institute for Fiscal Studies that, even on current policy, borrowing next year could be £63 billion, or £23 billion more than the most recent official forecast.

And given the government’s commitment to increasing investment spending, it added that even getting the current Budget into balance would not be enough to bring down underlying debt over the course of the parliament.

Still to be provided for are the costs of achieving the new targets for net-zero carbon emissions, reckoned by the Committee on Climate Change at between 1 per cent and 2 per cent of GDP in 2050, with a headline figure of £50 billion. The Department for Business, Energy and Industrial Strategy (BEIS) has estimated the cost would be 40 per cent higher, at £70bn a year. This would mean households paying an average of £2,400 every year between now and 2050.

Thus we have arrived at a paradigm shift – or kick-in-the-pants time. With ultralow interest rates, we can let the deficit balloon, as it has in other countries, with relative impunity. But that would leave us at the mercy of future rises in rates. In due course, taxes will have to go up, and charges introduced on areas as diverse as the digital economy to GP visits.

As ever, it is not what the chancellor announces that should worry us, but what he doesn’t. For the current course is, as the IFS bluntly put it, unsustainable.

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