It’s time to be bold to get us back on track
JUDGING by the noises we are hearing from HM Treasury sources, the Budget will make a lot of the need to raise more taxes and cut spending so the public finances are “kept in order”.
Short-term targets will limit borrowing and the current budget deficit. There will be talk about the limits feasible growth will set on spending and the pressure it will create for more taxes.
This will be accompanied by political rhetoric emphasising the Conservative commitment to “good housekeeping” and by gloomy forecasts on growth and deficits from the Office for Budget Responsibility, which has agreed to base these on old pessimistic estimates of post-covid growth.
Sadly, this is all very wrong-headed and excessively downbeat. As the economy emerges from Covid, output and revenues will be on a strong recovery path. In 2021 it looks like we will have growth of about eight per cent; this is likely to be followed by another eight per cent in 2022 as the economy gets back to its trend path.
Tax revenues will surge, and the huge flow of benefits during Covid will fall away.the public finances will get back close to the black; on our forecasts, borrowing in 2022-23 will be down to two per cent of GDP and falling subsequently. As for the long term, the debt/gdp ratio should be down to around 55 per cent in 2033-34, even if growth stays as low as its recent 30-year trend of about two per cent.
This long-term outlook should be the focus of the Budget.the UK has a strong record of solvency which has underpinned the confidence we have had, and still have, to borrow against future revenues. We hear words from treasury sources that it is “unfair to future generations” to borrow to fund deficits today. But this is untrue because by keeping taxes low and spending on sound infrastructure projects, both of which stimulate growth, future generations are better off and pay extra taxes from that extra growth.
Our forecasts again show this basic arithmetic; if the Government embarks on a programme of £100billion borrowing for this purpose, our models of the national and regional economy predict more growth, with the North benefiting most. If that growth is an extra one per cent, the programme pays for itself and the debt ratio in a decade falls to 45 per cent. Our models predict extra growth about two-and-a-half times this.
We should be forging a supportive strategy for growth, not assuming we must cut back.
At the very least, the Chancellor should return to the old-treasury view that high marginal rates of tax, such as we have currently, actually lower revenue by reducing the contribution of top earners and should be repealed as a minimum.
It is not just for growth that we need a robust approach to government borrowing.
We need it also to push the economy back to normal interest rates.the current situation of near-zero interest rates is unhealthy.
All in all, the Chancellor needs to be bold and resolute to put the economy back on to a healthy post-covid track and support the Brexit policies now being rolled out.