He had little to say about long-term macroeconomic issuesby George Magnus / March 8, 2017 / Leave a comment
Chancellor Philip Hammond’s last spring Budget—this ritual is going to be merged with the Autumn Statement—was never going to be remarkable. It was full of gags (credit to the author) but it also included the contentious boast that the Tories are “the party of the NHS”—without anything of substance to back it up. It was, moreover, a few sandwiches short of a picnic when it came to the macroeconomic issues which will dominate following the next set-piece government statement: later this month the government will announce the triggering of Article 50.
So what did this Budget amount to? The leaks were to the point on business rates reform. There will be an additional £2bn of funding for social care over the next three years, and a Green Paper for longer-term solutions later this year. In what is a clear breach of the government’s commitments on tax and national insurance, there will be a rise in national insurance obligations for the self-employed from April 2018. The Chancellor also announced measures to limit the tax advantages of setting up a company and being paid in dividends, additional funding for selective free schools, confirmation of increases in the national living wage and personal tax allowances, and small-scale allocations off the already agreed £23bn infrastructure commitment to science research, disruptive technologies, transportation and broadband.
The Chancellor had said at the outset that there was no scope for unfunded spending commitments in the future, in view of the nation’s £1.7trn debt, its need to borrow for the foreseeable future, and the fact that the interest bill alone is £50bn a year, exceeding the spending on defence and the police combined. He was true to his word. The OBR’s Table 1 “Spring Budget 2017 Policy decisions” reveals that additional spending will amount to £1.7bn in 2017/18 and £665m in 2018/19, but that this budget will recoup virtually the entire amount in the three years to 2020/21. It was, as far as details go, a modest Budget with some incremental, long-term policies whose success—or otherwise—will be revealed over time.
The macro material did raise some interest. Growth has been revised upwards for 2017, from 1.4 to 2 per cent. Yet in each subsequent year to 2021/22 the OBR has shaved its prior forecasts, so that the overall level of GDP by then will be essentially unchanged compared with the previous estimate. As a consequence mainly of the better short-term growth outlook, the amount of public sector net borrowing has also been revised significantly downwards in 2017/18—from £68.2bn to £51.7bn. Yet this improvement is fleeting: the path of public borrowing out to 2021/22 after this year is pretty much the same as it was.
The government doesn’t want to remind us that public borrowing is likely to increase if Brexit negotiations result in anything but a best case outcome for the economy. Nor does it want to remind us that it is doomed to get significantly worse anyway from around 2020, as the pressures from ageing, healthcare and social care costs and pensions begin to make themselves felt, year by year, for the next 25-35 years. The government should be preparing us now for these decades ahead in which non-interest public spending is predicted (by the IFS) to rise by 8 per cent of GDP—that’s about £160bn in today’s money—to almost 22 per cent of GDP.
Remember this is just age-related public spending, and says nothing about managing the Brexit process, adequate NHS funding, prisons, schools, industrial strategy and so on.
The fact that the net effect of government policies leans towards net revenue increases in the medium-term is a reminder of a key message from the Budget, even though it is one the government is anxious not to advertise. That is that as things stand, there is an overwhelming case for a general rise in taxation. To some extent, this will happen with so-called “fiscal drag,” under which rising inflation drags people into higher tax brackets. Yet this is by no means enough to make a meaningful difference.
The government has broken its National Insurance commitment today as far as the self-employed are concerned. In future budgets, it will have to extend this breach of commitment to the wider national insurance structure, income tax, VAT, and the increasingly anachronistic manifesto commitment to the triple lock on pensions. In time, a range of benefits paid to better-off older citizens will also be subjected to the search for savings and revenue enhancement. These though are for another day.
For the coming year or two, the government will hope that current Budget measures will hold up in the face of what will be a slide in economic growth, a squeeze on consumption as inflation picks up, the continuing funk in productivity growth, and the consequences on the economy’s growth potential and capital stock as the unchartable path to Brexit unwinds.