Sensible and grown-up but this falls a long way short of transformational

Thanks to the joys of a faintly improved economic outlook, the Chancellor was able to deliver a surprisingly large loosening of the fiscal thumbscrew in yesterday’s Budget in pursuit of his twin aims of improved business investment and reducing labour force inactivity. However, it will not transform prospects for the UK economy.

For that to happen requires much deeper structural reform than the smorgasbord of half measures and incentives served up yesterday. For starters a serious go at planning reform.

All bets are in any event off if the banking crisis that began with the failure in California of Silicon Valley Bank continues to snowball. With the share price of Switzerland’s second largest bank, Credit Suisse, in freefall, there were unnerving signs yesterday of the fires that are breaking out in the

US banking system turning global. Any such wider firestorm would render much of what Jeremy Hunt had to announce almost wholly irrelevant. Things would again be blown wildly off course.

As far as it went, this was a relatively sensible, grown-up set of measures which builds on the Chancellor’s trademark “steady as she goes, let’s not rock the ship” persona. After the pyrotechnics of his predecessor, Kwasi Kwarteng, it was dull indeed, but necessarily so. There was a limit to what Hunt could get away with.

The strategy is instead one of treading water while giving the impression, if not the reality, of sweeping supply-side reform in the hope that further improvements in the economic outlook will create scope for personal tax cuts nearer the election.

Beyond more support for energy bills, the free child care initiative, and the ludicrous “Brexit Pub Guarantee” (presumably meant as an attempt at irony, coming from a Chancellor who still privately believes Brexit was a mistake), there was little if anything for the demand side of the economy.

Rather, the Chancellor chose to concentrate what firepower he had on measures designed to improve the country’s economic potential.

The two eye-catchers were the so-called “full expensing” of business investment against tax and the decision to abolish the lifetime limit for pensions savings. Neither measure sets the pulse racing, or in itself is likely to win many votes. The latter initiative, although long overdue, will in any case only benefit relatively high earners.

But take everything together, and it added up to a surprisingly large loosening of the public purse worth nearly £22 billion a year at its peak relative to the pre-budget position. In so doing, the Chancellor has used up virtually all the extra headroom that a better than expected economy has opened up within his fiscal rules.

Sadly, this doesn’t mean that the tax burden is about to go down.

Yesterday’s giveaways are far outweighed by previously announced takeaways, with the tax burden still on course to reach a post-war high of 37.7 per cent of GDP in five years’ time.

After the disaster of last autumn’s mini-budget, the Chancellor could not afford to break his own fiscal rules, which in any case are already so loose as to be virtually worthless.

Even so, he only squeezes in by the narrowest of margins, and after considerable sleight of hand. For instance, the Chancellor says that he intends to make the full expensing regime for business investment permanent, but initially he plans for it to run for only three years. The effect of the three-year cut-off is to transform a measure which is initially very costly into a net positive for the public finances after it expires.

The revenue forecasts also include a quite considerable uplift in fuel duty receipts from 2027-28 onwards from the Government’s stated, but hardly ever implemented, policy of raising duties in line with inflation. As the

Office for Budget Responsibility cuttingly remarks, “cancelling these planned increases, as every Chancellor has done since 2011, and instead holding the duty at its current rate, would more than halve the Chancellor’s headroom”.

Furthermore, the forecasts seem to take little or no account of the Government’s separate targets for abolishing the internal combustion engine, which by then ought to be well under the way to being met. Believe it if you will.

But for these two assumptions, the Chancellor might not have met his principal fiscal rule, which is to have debt falling as a proportion of GDP at the end of five years. As it is, he only does so by a tiny 0.2 per cent of GDP, which given that it applies to the economy as it is assumed to be so far in the future, is a largely meaningless finding.

The big worry for the public finances remains firmly focused on debt servicing costs, which after years of money printing and zero interest rates, continue to rise precipitously, eating deep into the Government’s scope for spending increases and tax cuts. Not until there is some prospect of bringing these back under control can the Chancellor think seriously about the vote buying tax cuts he says he aspires to.

Let’s not be churlish. There is much in the Chancellor’s reform agenda to like.

Smarter and nimbler regulation in life sciences, which actually doesn’t cost anything in terms of taxpayer pounds, is self-evidently the way to go to help make Britain the science powerhouse it aspires to be. The Chancellor has also neatly defused much of the criticism of planned increases in corporation tax by giving back half of what they raise in enhanced allowances.

But as a transformational package of measures needed to make the UK into the high-productivity, high-skill, high-wage economy we all hope for, yesterday’s smorgasbord of leftovers fell a long way short. And the way things are going in global finance, there will soon be rather more existential matters for the Chancellor to worry about than “returnships” and the spurious precision of whether or not he meets his own fiscal rules.

After the pyrotechnics of Kwasi Kwarteng, it was dull indeed, but necessarily so. There was a limit to what Hunt could get away with