Not what it said on the tin

As I have noted many times before, UK budgets are a strange mixture of policy announcements and pantomime and they exist in their present form purely for reasons of tradition. Once upon a time they were put together behind closed doors with ministers sworn to secrecy in case any of the details leaked out. Back in 1947 Chancellor of the Exchequer Hugh Dalton resigned after an off-the-cuff remark which hinted at forthcoming tax changes. But the era of ‘Budget Purdah’ is no more: We have been bombarded with news of what was likely to be in the autumn budget for weeks as the process morphs from a one-off event to a rolling news story. Indeed, the Speaker of the House of Commons expressed concerns that budget measures were leaked to the press before being announced in the House of Commons, which is a breach of protocol. The Deputy Speaker who presided over proceedings on Wednesday welcomed Chancellor Rishi Sunak to the Despatch Box with the pithy comment that she looked forward to the “remainder of your announcements.”

This does not mean that the process of digesting the information is any easier. The government’s 2021 budget was accompanied by the usual 192 page Budget Redbook, which this year also contained details of the Spending Review, whilst the OBR put out its regular 244 page Economic and Fiscal Outlook. Once we factor in the plethora of supporting documentation, it is clear that there is a huge quantity of material to digest. You can thus be sure that a serious amount of work has gone into the impressive overnight summaries produced by think tanks and the detailed analysis conducted by the quality press.

There are essentially three things to focus on in this year’s budget analysis: (i) what are the economic assumptions underpinning the budget; (ii) what fiscal measures has the government announced and (iii) how big is the spending envelope within which government departments have to work? These allow us to form an overall impression of the fiscal stance: The bottom line is that the projected outturns do not square with the message which the Chancellor has tried to put over. In short, living standards are likely to improve much more slowly than in the recent past; we are all going to be paying more taxes and the voracious health sector will continue to gobble up an increasing proportion of the nation’s resources. If the low tax, small state policies of Margaret Thatcher have long since been buried, this latest budget represents a dance on their grave.

The state of the economy

One of the defining features of the economic forecast is that real output is projected to get back to its pre-pandemic level by end-2021 which is slightly earlier than in the March projection and far sooner than anticipated last year. The OBR also reduced its estimate of the impact of the pandemic and now anticipates a permanent output loss of 2% (this was projected at 3% in March). However, it reckons that Brexit will lead to a permanent output loss of 4% in the longer-term. For all the concerns about the economics of the pandemic, it is Brexit that will inflict the most long-term damage. Obviously the pandemic feels like a big deal because the economic impacts are compressed into a relatively short time frame. Moreover the wider social costs are incalculable (140,000-plus deaths and counting) but much of the economic damage will be recouped quickly.

In many other ways the economy is predicted to quickly resume its pre-pandemic state with the unemployment rate on a two year horizon projected to fall to 4.2% – close to pre-2020 levels. One thing we will have to get used to is higher inflation, which the OBR forecasts will peak around 4.4% in the second quarter of 2022 – more than twice the BoE’s target rate – with risks tilted to the upside. Whilst this will squeeze real household incomes it will also inflate the tax base which will support tax revenues. All in all, there is not much to get excited about in the macro forecast. There are always areas for discussion but on the whole it seems a solid enough assessment. The real areas of disagreement lie in the fiscal detail.

The fiscal measures

The biggest single giveaway represented changes to Universal Credit designed to provide a boost to low earners (a £3bn giveaway over five years). This was welcome following the announcement last month that the temporary uplift to welfare payments during the pandemic was to be scrapped. In response to the storm of criticism that followed this decision, the Chancellor announced that the taper rate at which benefits are phased out as claimants transition back into employment is to be lowered. This was previously set at 63%, meaning that above a certain income threshold claimants lose 63p of every pound of benefit they receive, implying a very high marginal tax rate. This is to be reduced to 55% and is a move I have been advocating for a long time. However, as the Resolution Foundation points out, this is “not sufficient to compensate most UC recipients for the loss of the £20 a week uplift introduced at the start of the pandemic.”

Looking down the list of items, the next biggest giveaway was a further freeze on fuel duties (£1.6bn) – somewhat ironic given next week’s COP26 Summit at which the UK is hoping to take credit for brokering a global climate deal. Sunak also announced a 50% reduction in domestic Air Passenger Duty in order to “bolster UK air connectivity” which is similarly incongruous.

The spending envelope

The good news is that almost all departments will receive an increase in their day-to-day budgets over the period to fiscal 2024-25. The bad news is that in real terms many departmental budgets will remain below the levels prevailing when the Conservatives came to office in 2010. The era of austerity may be over but not by enough to overcome the damage done in the decade prior to the pandemic. One of the lessons we have learned the hard way is that spending on health is important and that it was underfunded prior to 2020. Thus spending on health and social care is projected to be over 40% higher in real terms by 2024-25 than in 2009-10. However, spending by the Department of Transport will be 32% lower in real terms and the Ministry of Justice will suffer a 12% cut (chart below). Sunak made great play of the fact that “the health capital budget will be the largest since 2010” and that the budget “will restore per pupil funding to 2010 levels in real terms.” Yet it is hardly a great boast that spending levels are to be restored to levels prevailing when the Tories took office 11 years ago, and calls into question what was achieved by the years of austerity.

What to make of it all

By common consensus this was a high tax and spend budget. It marks a seismic shift in the fiscal philosophy of a Conservative Party that has extolled the virtues of a small state and lower taxes for the last 40 years. Sunak’s goal may be to reduce taxes, as he told us in his budget speech, but in reality the overall tax burden is set to rise to its highest in 70 years. In some ways this is an inevitable response to the challenge posed by the pandemic. 

In his parliamentary speech Sunak outlined his old-style Tory leanings: “Do we want to live in a country where the response to every question is: “what is the government going to do about it”? Or do we choose to recognise that Government has limits.” The truth is that many people do want more government – or at least, they don’t want less. For a start they want some return on the large slice of income that they hand over in taxes. Furthermore the pandemic has highlighted the importance of having government act as a backstop (ditto the GFC of 2008-09). 

Sunak is an intelligent man and I am sure he knows this. The thought therefore persists that the budget was in part a job application to the Tory faithful in the event that they tire of Boris Johnson as leader, whilst simultaneously following Johnson’s requirement to shower the electorate with money. In the end all budgets come down to politics but this one perhaps more so than usual.