UK bud­get cri­sis

The Pak Banker - - FRONT PAGE -

Philip Ham­mond, the UK's chan­cel­lor will be propos­ing a bud­get to­day amid po­lit­i­cal chaos, fal­ter­ing pub­lic ser­vices, sim­mer­ing anger and, in the back­ground, the specter of Brexit also. He is sup­posed to si­mul­ta­ne­ously cut taxes, end aus­ter­ity and re­duce debt. It's an im­pos­si­ble task. And this bud­get - the last be­fore Brexit - will be a pre­mo­ni­tion of big­ger de­bates to come.

Start with the good news. Britain's bud­get deficit is now about 2 per­cent of GDP, down from 10pc in 2010. Pub­lic sec­tor debt, for the mo­ment, is un­der con­trol. A fore­cast from the Of­fice for Bud­get Re­spon­si­bil­ity sug­gests Ham­mond will have an added $ 16.7 bil­lion a year to work with, thanks to higher- than- ex­pected tax rev­enue.

He'll need it. Fis­cal pru­dence has come at a steep pub­lic cost. Most ob­vi­ously, ser­vices are break­ing down. Crime is ris­ing, even as po­lice bud­gets fall. A once- promis­ing wel­fare re­form is in tur­moil. There's talk of crises in ed­u­ca­tion, hous­ing, prisons, trans­porta­tion and more. Some of this may be over­heated. But the pic­ture isn't en­cour­ag­ing. Mean­while, the UK is ag­ing quickly: 26 per­cent of its pop­u­la­tion will be over 65 by 2067, up from 18 per­cent last year, im­ply­ing a steep in­crease in costs for pen­sions, health care and long- term care, among other things. The Euro­pean Com­mis­sion es­ti­mates age- re­lated spend­ing will be more than a quar­ter of GDP by 2065.

Brexit will am­plify ev­ery one of th­ese prob­lems. Slower growth, less mi­gra­tion and up­ward pres­sure on in­fla­tion due to a weaker pound will worsen the fis­cal out­look. Plans to erect new bor­der con­trols - so far a sham­bles - could prove costly for years to come. Then there's the small mat­ter of the 39 bil­lion- pound ($ 50 bil­lion) exit bill. One year's bud­get can't re­solve th­ese chal­lenges, of course, and the un­cer­tainty im­posed by Brexit would make it fool­ish to try. But it can sig­nal pri­or­i­ties. For now, there should be two. The first is to ad­dress the de­te­ri­o­ra­tion of Britain's es­sen­tial pub­lic ser­vices - as Prime Min­is­ter Theresa May has promised. By one es­ti­mate, this would re­quire ad­di­tional spend­ing on the or­der of 31 bil­lion pounds ($ 40 bil­lion) a year by 2022. That isn't re­al­is­tic. But at a min­i­mum, the bud­get could make good on May's promised boost to the Na­tional Health Ser­vice, while com­mit­ting to keep­ing spend­ing on most other ser­vices con­stant in real terms. Even that won't be cheap: about 19 bil­lion pounds ($ 24.4 bil­lion), reck­ons the In­sti­tute for Fis­cal Stud­ies.

Thus the sec­ond pri­or­ity: Ad­e­quately funded pub­lic ser­vices will re­quire higher taxes, and the bud­get should say so. For starters, Ham­mond could pro­pose a fur­ther re­duc­tion in tax re­lief for pen­sion con­tri­bu­tions, less gen­er­ous tax ben­e­fits for the well- off, and a more mod­er­ate tax cut for cor­po­ra­tions than his party has promised. He could also pro­pose elim­i­nat­ing ex­emp­tions to the value- added tax and boost­ing na­tional in­sur­ance con­tri­bu­tions. None of this, to put it mildly, would be pop­u­lar.

In the end, Britain's fis­cal prob­lems might be im­pos­si­ble to solve with­out higher growth. That, in turn, will re­quire a re­cov­ery of eco­nomic con­fi­dence, and an end to the risks and anx­i­eties that Brexit has caused. That isn't in Ham­mond's power this week. All he can do is limit the dam­age.

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