The budget was a non-event and kicked big decisions down the road

I was wrong. Before last month’s budget I thought it would be the defining moment of this parliament. In its immediate aftermath I thought it was a big deal, a huge set of tax, spend and borrow decisions. As the dust has settled on it, though, I’ve changed my mind. It was not a big event at all. It did little more than apply some sticking plasters and do the minimum required to allow the government to stagger through to the next fiscal event.

I know what you’re thinking. Johnson has finally lost it. He is calling a budget that increased spending by £70 billion a year and taxes by £40 billion a year, to their highest level ever, a non-event. How can it have been anything other than historic and parliament defining?

Here are four reasons for this “non-event” view of the budget. First, it was just a continuation of the sharp increase in tax and spending we saw under the last government, not a change in direction at all. Second, it kicked the big decisions on public service spending down the road. Third, there was no serious reform of any kind within it, and certainly no hint of tax reform. Fourth, the increase in investment spending apart, there was nothing there for growth, supposedly the central focus of this government.

Someone looking back at the economic history of the 2020s from the perspective of, say, 2050, will see this budget as just one part of what is a genuinely historic change: an extraordinary increase in the size of the British state. Over this decade, tax and spending will increase by a huge 5 per cent of national income but most of that increase occurred under the last government. It has been made all but inevitable by the combination of high debt and high interest payments, poor growth, demographic change and a continued increase in spending on health and other parts of the welfare state. We can no longer squeeze defence spending or impose austerity on “unprotected” departments to meet these pressures. This budget simply played its part in accepting this surge.

As far as public service spending is concerned, what we saw was an emergency injection of cash to prop things up in the short term. Given the urgent needs evident in local government, health, justice, prisons and the rest this is more than understandable. The last government’s plans would not have been sustainable without a further deterioration in provision. Spending this year and next is to rise by an average of 3.4 per cent a year: quite fast, but nothing dramatic by historic standards.

After that? Well, the numbers the chancellor published suggest three years of very tight spending control. The growth of 1.3 per cent a year that is pencilled in would probably mean some cuts and certainly no scope for growth outside of health, defence and one or two other favoured areas. The hard decisions have been deferred. They will be taken in next year’s spending review, due “late spring 2025”, when allocations will be made to the various departments for 2026 onwards. That is when we will find out whether the chancellor is able to get her cabinet colleagues to sign up to specific spending settlements for individual departments. If she sticks to these overall plans she is going to find that a very hard sell indeed. I would be amazed if more money is not found at some point. If she is lucky she will get that from better-than-expected growth. If she is unlucky, expect her to come back with more tax increases. The real decisions on spending are still to come.

As for reform, and especially tax reform, there was barely any. Yes, taxing inherited pension pots is a modest move in a sensible direction. There is unquestionably a principled argument for reducing the extent to which farm and business assets are privileged by inheritance tax. But these changes are small beer indeed. There was no effort at much-needed reform of capital gains tax, just an increase in rates. Raising employer national insurance contributions takes the tax system in the wrong direction, increasing the wedge between the taxation of income from employment and other forms of income, including that earned from self-employment. As for the failure even to index fuel duties and the incomprehensible decision to raise stamp duty, well those were steps away from anything resembling a coherent tax system. Clearly, any decisions on tax reform have been deferred to the next budget. Or perhaps, God help us, there simply is no appetite for reform. We still don’t know.

On growth, credit where it is due. Increasing planned investment spending when faced with tight public finances has not been the go-to option for previous chancellors. All too often they have cut investment spending, and sometimes sharply. The economic benefits of higher investment take many years to be felt, so there is little political upside within the term of a single parliament. Even here though, look under the bonnet of the decisions and you see spending not especially focused on growth. More money for net zero and to build schools and hospitals is commendable, but not the most growth-friendly way of allocating capital. Really, that was it as far as growth was concerned. Nothing serious on planning, trade, competition, education, regulation, tax reform or any of the other policies we know matter for getting the economy growing. Plans here will, presumably, be revealed over the coming months and years.

Of course, it is still very early days and all this is genuinely complex. It was probably foolish to expect much more but in the cold light of day it is clear that this was a budget aimed largely at getting through the next 12 to 18 months, at buying time, not at setting an agenda for the rest of the parliament. The defining moments for this government are very much still to come.

This article was first published by the Times, and is reproduced here with kind permission.