This was not a Labour-style budget—just look at the consequences for society’s poorest

The headline sums looked promising but this plan will raise inequality

March 12, 2020
The front door of 11 Downing Street, London, from where Chancellor Rishi Sunak will leave before heading to the House of Commons to deliver his Budget.
The front door of 11 Downing Street, London, from where Chancellor Rishi Sunak will leave before heading to the House of Commons to deliver his Budget.

There is no denying this was a big budget. A year ago, if you had told Philip Hammond that the next government would increase spending by £40bn each year, he would probably have guessed that Labour would be in power.

That is particularly true because Rishi Sunak’s plans are not powered by any new optimism about the health of the economy. Even before taking covid-19 into account, the Office for Budget Responsibility’s projections for GDP are down compared to 2019. And they would have been down even more had the office not factored in the expansionary effects of the new spending: the OBR forecasts that over the next two years GDP growth will be 0.5 per cent larger than it otherwise would have been, just because the spending taps are on.

This recognition of the positive feedback loops involved in raising spending is good news for critics of austerity economics and chimes with the Fabian Society’s 2018 report “The Fiscal Alternative.” The OBR also says that the plans will raise cumulative GDP growth by another 0.5 per cent from the mid-2020s onwards, as the effects of new capital spending kick in. Again, this is a welcome boost for those who have long called for more future-focused public spending.

There will be some difficult fights during the forthcoming spending review, to ensure the growing pie is shared sensibly across the public sector, including hard-pressed areas like local government, social care and justice. But that task is easier when the pie is expanding. Total real spending will rise by close to 3 per cent a year in both 2020/21 and 2021/22. These aren’t far off the numbers we used to expect when Labour was in power.

But even before the spending review comes there are problems underneath the bonnet in the way the money is being shared out. Real capital investment will rise by almost 20 per cent in the next two years and departmental spending by close to 10 per cent. But that leaves nothing over for spending to support living standards through social security. The budget small print reveals that real welfare spending is projected to increase by less than 2 per cent by 2022. Indeed, in 2021/22 the government is planning to cut real spending on means-tested benefits for children and working-age adults.

This is a recipe for rising inequality and poverty that will hit poor places hardest. In the short term the budget measures will increase inequality, because the combined effects of the tax and benefit changes announced take money away from the poorest 10th of households and give an average of £100 a year to households in the 8th and 9th deciles of the income distribution.

But it is the medium-term implications that are more concerning for family incomes. The OBR forecasts that real earnings will rise by more than 1 per cent each year, boosted partly by higher public spending. But the Treasury’s social security plans assume that working-age benefit increases will only match inflation. With this mis-match between wages and social security, the gap between low- and middle-income households will widen year by year, increasing poverty and destitution. And that’s on top of previously announced welfare cuts which will continue to be implemented, particularly hitting families with more than two children.

Apart from a change of heart from Sunak, the only thing that can prevent this injustice is something that no one wants—a major recession. The 2008 crisis hit earnings and employment across the economy and narrowed inequality. This is the absolute opposite of “levelling up.” I fear decisive fiscal intervention will be needed later in the year to prevent the covid-19 crisis making everyone poorer. But in the long-term, the only way to raise living standards for low-income Britain is to spend more on social security along with everything else.