Budget 2023: new normal, old problems

Jeremy Hunt made a smart centrist pitch, but beneath the rhetoric Britain’s economic reality remains shockingly rigged in favour of the rich

March 22, 2023
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The Budget mood music wasn’t quite “happy days are here again”, but it was at least “normal days are here again.”

Future growth will be just about OKish. Inflation will soon drop to ordinary levels. And the chancellor acted like chancellors typically do, sprinkling around little cheques for a host of things—AI prizes, swimming pools, cheaper post-Brexit pints—that make for a colourful speech, while also giving some attention to real economic challenges, which in 2023 include post-pandemic worker inactivity and woeful business investment.

All decidedly standard stuff, and yet in light of recent circumstances, also decidedly reassuring. As Jeremy Hunt announced expanded childcare he sounded a good deal more relaxed than Keir Starmer did in trying to figure out how respond to the government’s newly centrist economic tone.

The reason why this week’s “new normal” felt almost disruptive is, of course, because of what came before. In the mere six months running up to the chancellor’s turn in the spotlight we had had two huge “fiscal events”, both wildly unsettling—in wildly different ways.

In September, we had Liz Truss and Kwasi Kwarteng’s firework display of libertarian fantasies. By October they had blown themselves up, and the next month Jeremy Hunt was at the despatch box offering a dark future of unremitting fiscal conservatism, in which taxes would rise instead of fall and public services were squeezed for as far as the eye could see. We were in for a new age of austerity, where the only things that could be done were those built on a “a rock-solid commitment to rebuild the public finances”—a formulation which, if the experience of the 2010s offered any clue, would mean most of the great challenges facing society and indeed the economy receiving no answer at all.

In the months since, we have been sharply reminded of the perverse logic of austerity by, among other things, rumours that the HS2 rail-link between Britain’s mighty metropolis and its vaunted “northern powerhouse” could permanently terminate five miles short of central London. Meanwhile, for years, if not forever, the line is set to stop 80 miles short of Manchester. We have collectively spent tens of billions on a train that may not go from nor to the places it was mean to connect. This is the sort of short-termism which, when taken together with Brexit, has helped to push Britain to the bottom end of the G7 growth league, as the FT’s Economics editor Chris Giles has unsparingly highlighted.

Before hailing the Budget for returning us to “normal”, therefore, we should just recall just how grisly are some of the problems that we have become wearily accustomed to accepting as “normal.” One such problem is the grotesque lopsidedness of the distribution of wealth. Figures from the Office for National Statistics (see chart below) record the top tenth of us owning virtually half of all there is to be owned, while the whole of the bottom 30 per cent together possess little more than one-hundredth. On most measures, the underlying data suggests, this wealth gap has been getting worse, rather than better.

For many years now, the high priests of technocracy at the OECD and the IMF have been warning that runaway inequality is liable to depress growth. Certainly, the recent trend in average living standards is dismal by historical standards, and for harder-pressed parts of the population the picture is even worse.

But in this week’s run-of-the-mill “Budget for growth”, the great gap between families (rather than regions) is one long-term feature of Britain’s political economy we heard virtually nothing about.

Indeed, it was hardly open to the chancellor to get into this issue, seeing as some of the major tax policies he unveiled seemed almost designed to make matters worse—namely, the decision to increase the £40,000-a-year limit on tax-free pension contributions by 50 per cent, and to entirely abolish the £1m cap on fully tax-privileged pension pots. The combined cost of these moves will be £1bn-plus each year. You need to be chipping in £60,000 a year to get the full gain from the first, and to have accumulated over a million to even start getting any benefit from the second. This amid a poverty crisis.

There are, as always in matters of tax, bewilderingly technical arguments about policy design: the Institute for Fiscal Studies recently argued it might be worth increasing the lifetime cap if the move were coupled to other changes to reduce the bias in favour of the rich. Responding to Hunt, the experts suggested he had made one such balancing move on pension lump sums, but it was nothing like enough to even things out. In particular, some feared he had opened up a costly loophole in inheritance tax, by allowing the wealthy to pour vast funds into pensions before passing them on tax-free.

All this was rationalised by Hunt’s hope of persuading senior doctors to slog on for longer, an upside-down policy if ever there was one: it would be far more straightforward to address medics’ pensions and pay directly. Indeed, it is an entirely open question as to whether the response of high earners to this giveaway really will be to toil any more at all. They might instead give up even earlier, having built up the pension they think they need more quickly than before.

This benign presumption about the behaviour of Britain’s have-a-lots contrasted starkly with the judgements about parents on benefits, who will now—as the flipside of extra childcare—be forced to attend extra jobcentre interviews.

But in truth, this slanting of policy, too, is “normal” in a tax and benefit system that reliably gives to those who have. Just think of, among many other examples, the huge tax-free capital gains that accrue on family homes, a council tax system that is regressive by design with respect to property prices, and the extraordinary skew inherent in the array of savings incentives for those who’ve already got a lot in the bank.

Failing to grapple with all this threatens to stir the great giant of pensioner poverty out of its current state of rest. More than that, of course, it threatens to starve the Exchequer of the resources it needs to rescue Britain’s battered public services, including the NHS.

A pension giveaway in the name of the health service sees the tail wag the dog. More precisely, it sees the extreme upper tail of the income distribution wag the dog.

So, yes, this was a “back to normal” Budget. But it was also a reminder of just how bankrupt is the “normal” Britain has grown used to. Only by moving beyond it can the country truly move ahead.