Low-tax ambition has been abandoned
It is a measure of the political turmoil of recent times that Jeremy Hunt delivered the fourth major economic statement in 12 months as the third occupant of the Treasury in that period. The last full-scale Budget-in-all-but-name was the ill-fated “go for growth” package of Kwasi Kwarteng, which triggered his removal and the downfall of the prime minister Liz Truss.
Mr Hunt’s Autumn Statement in November reversed many of his predecessor’s measures and calmed the markets. His Budget yesterday was designed to consolidate that cautious approach ahead of what Tories will hope is an eve-ofelection, tax-cutting package next spring.
Mr Hunt was buoyed by the prediction from the Office for Budget Responsibility (OBR) that the economy would not enter recession this year as feared. The OBR factored into its calculations stronger tax receipts, falling energy prices and measures to get people back to work. Certainly, the economy is in a better shape than had been anticipated during the pandemic, when activity was almost halted and unemployment was the concern. Not only did that fail to materialise but the problem today is a shortage of labour across the economy, from construction to hospitality.
To address that, Mr Hunt announced a number of measures intended to get people back to work. Some two million who are either long-term sick or disabled will be targeted by special employment programmes. A further two million who can work but are on benefits will be expected to take up job offers, an ambition that has eluded past governments.
In addition, Mr Hunt abolished the lifetime tax-free pension allowance, principally in a bid to arrest the exodus of senior doctors from the NHS for whom the current £1million limit is a disincentive to carry on working.
One of his biggest announcements concerned childcare, with an extension of the 30-hour offer of free places to all children over nine months from next year. Britain has the most expensive childcare in Europe, which Mr Hunt said was holding back an expansion of the female workforce. If the same proportion could be achieved here as in the Netherlands, there would be one million more women working.
His reforms are aimed at making childcare more affordable and accessible, attracting new childminders with special payments while helping nurseries to hold down costs and therefore fees.
If this succeeds then it will make a big impact. As the Chancellor said, we cannot have growth without a bigger, more productive workforce. But nor can we have growth in a high-tax environment. The context of this Budget, however expertly it was dressed up, is that the tax burden is higher than at any time since 1945.
This is the consequence of freezing allowances, dragging millions more into higher rates, raiding dividends and putting up corporation tax from 19 to 25 per cent. Corporation tax receipts as a share of the economy will rise to their highest level since the tax was introduced in 1965.
To soften the blow, Mr Hunt announced a set of allowances for companies investing in particular sectors. But if the country wants to attract investors to fuel growth, it would have been far better to have kept the rate where it was, one of the lowest in the industrialised world. High taxes are matched by high spending. The size of the state will be greater than at any time since the 1970s, partly inflated by continued support for energy bills and the legacy of pandemic interventions, but mainly by health and welfare spending.
The twin Thatcherite ambitions of a low-tax, small-state Britain have, to all intents and purposes, been abandoned because Labour, should it win the next election, will do nothing to reverse these trends. Supporters of Ms Truss and Mr Kwarteng insist that their prescription for reviving growth was the correct one, even if the way it was implemented proved calamitous.
What Hr Hunt billed as a Budget for growth will see an upturn to 2025, according to the OBR, but after that growth falls away again. This did not feel like a sustainable plan for long-term economic expansion and often got lost in pettifogging details that were a reminder of the Gordon Brown era, such as the regeneration of Tipton town centre. Nonetheless, Mr Hunt sees such projects, along with 12 enterprise zones around the country, as fulfilling the “levelling up” agenda on which the Government was elected in 2019.
Too many Budgets either involve unravelling the mistakes of their predecessors, as with pensions, or initiatives that come far too late in the day. A new push for the expansion of nuclear power, based around small modular reactors, is welcome but should have happened 12 years ago. Mr Hunt wants to tackle low productivity, but this has been a scourge for over a decade. He has allocated more money for defence, but not enough. Moreover, he had nothing to say about housing, an important issue for younger people.
All in all, this was a Budget to mark time, steer clear of surprises and avoid the sort of market turmoil that greeted his predecessor’s effort last September. Mr Hunt said those who saw the future as one of inevitable economic decline were wrong, but he has yet to devise a convincing strategy that will prove them so.