The Chancellor shouldn’t seek quick fixes in tomorrow’s Budget
March 19, 2013
We should neither expect, nor want, fireworks on Wednesday.
There is no doubt that the Chancellor’s room to manoeuvre is incredibly limited. Much of this, of course, can be attributed to global events – we only need to look at the weekend’s dramatic news from Cyprus to know that the Eurozone crisis is far from over. However, it has also become ever clearer that in the coalition’s first Budget in Jun 2010, the government was complacent about growth.
The short pre-election boom following 2009’s VAT reduction and the large, early rounds of quantitative easing, lulled the coalition on assuming office into believing that the growth baked into the system would somehow do the heavy lifting when it came to deficit reduction. The coalition’s plan to eliminate the structural deficit required the gap between revenue and expenditure to be narrowed by £159 billion in 2014/15. Tax rises were expected to contribute £31 billion and spending cuts £44 billion to this total.
Unfortunately, however, the coalition ended up with the worst of all worlds. It has received relentless criticism for harsh austerity measures when in reality, too often it has lacked the political will and necessary competence to execute the levels of savings required. The fact is, for all the rhetoric, we are still overspending by some £300 million each and every day and thus needing to borrow to the tune of £120bn year-on-year. In 2010 we should have looked the electorate in the eye and been quite clear about the magnitude of the task that lay ahead to rectify the public finances. Early u-turns on school sports, forestry and book reading schemes augured ill for the government’s ability to push through some of the more important and wide-ranging savings.
But we are where we are.
I personally take the view that talk of radical tax cuts as the vital shot in the arm following this Budget is unrealistic. As a former businessman myself, of course I want to see taxes down as low as possible. However, I fear confidence is so low at the moment that until it is restored, almost any tax giveaways are more likely to be squirreled away as savings either for businesses or individuals than pumped back into the economy. We would also run the serious risk of the markets losing faith in the event that we played faster and looser with public borrowing than we are already doing. In spite of the recent loss of our triple A rating from Moody’s, the Chancellor’s great achievement – and this really should not be underestimated – is that we are still able to borrow at such low interest rates. The lesson of both 1931 and 1976 is that once the markets turn, all is lost.
Similarly, we probably have to get real about the likelihood of the coalition being able to enact further, significant public spending cuts in advance of the 2015 election in addition to those already planned in years four and five of this parliament. That is not to say that in an ideal world we should not try. We are, after all, continuing to live well beyond our means. But the notion that anything we do now, with only two years to go until the General Election, will have a sufficiently significant impact on the economy is probably unrealistic.
So anticipate a bland Budget.
Since it is hard to see in the short term how we can bridge the sizeable gap in the national finances, my main hope for this Budget is that the coalition takes some of the long term decisions that the British economy requires. I think there will be some targeted additional borrowing for some of the shovel-ready projects like housebuilding, science parks and in areas like the technology sector. Ideally we would also try to give businesses certainty on the some of the key long-term issues facing the British economy, particularly over aviation and energy. We cannot let these political footballs be kicked into the next parliament once again.
I should also like to see the Chancellor put some light at the end of the long tunnel the British economy is currently travelling through. The magnitude of Britain’s difficulties is intimidating and I am not implying the government has an easy job – the legacy it inherited was a grisly one and a crucial part of building an environment favourable to enterprise involves unravelling that legacy. Nevertheless, for our nation to be successful and for our Party to enjoy popular electoral support, it must first level properly with the public when it comes to just how serious our finances are (no juvenile name calling, no blaming the ‘last government’, no partisan political dividing lines).
After that, however, it must tell a positive story, recognising that in today’s global race, successful countries will be those in which ideas and dynamism are captured and retained. That translates as an immigration system open to the highly skilled from across the globe so that innovative and creative people can gather to exchange and develop ideas. It means governments creating certain and stable environments that breed confidence when it comes to borrowing and lending. Places where infrastructure is targeted so that hubs like the Silicon Roundabout growing around Old Street being linked into transport, supply and high-speed broadband networks. Regulatory environments in which the taking on staff is not perceived as too costly or high risk. Places where universities and schools provide the market with employees who are well-equipped and eager, with an appreciation of what they need to do rather than what they are owed. Where governments are much more consumer-focused and able to adapt to change themselves.
Is our government currently providing such an environment? Well usually it is getting the rhetoric right. I very much support, for instance, the high profile business delegations to India and the focus on high speed visa processing for business people looking to come to the UK. But there are two things that worry me: first, the gap between the government’s rhetoric and its success at following through, and second, the anti-success narrative that seems to be developing in our nation.
Entrepreneurial enterprise, of which we need more so desperately, has always required a degree of risk-taking. But nowadays the risks seem greater because in spite of what the government says, there are still hefty taxes to pay, the cost of living is stubbornly high, banks remain reluctant to lend and it is still too costly to take people on. Furthermore, tax law seems much less certain and the general population far more receptive to the bashing of the wealthy, wealth-creators and capitalism than has until recently been the case. I speak to people in businesses large and small in my constituency and I talk to leaders in the City – not, I hasten to add, exclusively in the banking profession. Suddenly, for the first time ever, global corporations are beginning to consider the almost unthinkable prospect of political risk being attached to the UK. Small wonder few will expand so rapidly anytime soon. Politicians of all colours cannot keep stoking up the hue and cry towards big corporations.
If there is one thing the Chancellor can do, it is to forget about pressure for quick fixes and transient boosts and focus relentlessly on delivery as well as longer term measures to make our nation a more tempting prospect. If we are not to get breathtaking growth before the 2015 election, let’s at least get some credibility for doing the right thing for Britain in the long term and give people some sense of hope for the future.