So now we know. When push comes to shove it’s not tax rises and it’s not the NHS
that Mr Hammond is willing to gamble on, it’s the public finances. Because
yesterday’s Budget was a bit of a gamble. Yes the OBR reduced borrowing forecasts
so he was able to find more money without committing to more borrowing. But what
the OBR gives the OBR can take away. Suppose the public finance forecasts
deteriorate significantly next year. They might. There’s perhaps a one in three
chance of that. What will he do then? It’s hard to see austerity starting up again with
promised spending increases not materialising. The chances of getting sizeable tax
rises though parliament are next to nil. It’s surely borrowing that would take the
strain. Fair enough. That’s a judgment. But it’s a judgment that could see debt
ratchet upwards.
For now though Mr Hammond will be thanking his lucky stars for the OBR. After all
who would have believed a Treasury forecast which just happened to allow more
than £20 billion of additional spending on the NHS without either any tax increases
or any effect on forecast borrowing? And that really is the story of yesterday’s
Budget. Lots of extra money for the NHS “paid for” by better borrowing forecasts.
There was something missing though. Back in March Mr Hammond made the
following announcement “I can confirm that at this year’s Budget I will set an overall
path for public spending for 2020 and beyond. With a detailed spending review in
2019. To allocate funding between departments. That is how responsible people
budget. First you work out what you can afford. Then you decide what your priorities
are. And then you allocate between them”.
I took that to mean he would be announcing a total envelope for the forthcoming
spending review period. He didn’t. There are some revised assumptions in the OBR
forecasts, but no spending total has been set. So while this was a big Budget in many
ways, it lacked the expected punchline. And as for working out what you can afford
and then deciding on priorities, he has instead decided on priorities – NHS, NHS and
NHS – before deciding total spending.
So to the inevitable question, “is austerity over?”. Well we will only really know when
we have some firmer plans, but from the numbers we have I think we can say the
following:
- There was a big upward revision to overall spending plans;
- Spending on the NHS will rise substantially – though less quickly than spending has risen on average over its 70 year history;
- Total day to day spending on public services (RDEL) is planned to rise by about 8% between now and 2023-24, but spending outside of protected areas is essentially flat – and indeed ticks up next year before falling a bit. It falls on a per capita basis;
- Despite more money for Universal Credit there are still £4 billion or so of net welfare cuts working their way through the system, most obviously with the freeze to the rates of most working age benefits next April;
- Total spending is set to rise in real terms but to fall very slightly as a fraction of national income.
Does that add up to the end of austerity? On a narrow definition perhaps it does, on
wider definitions it doesn’t, at least not yet. But whatever the precise definitions this
is certainly a considerable easing in spending control and a change of fiscal
direction. Any idea that there is a serious desire to eliminate the deficit by the mid
2020s is surely for the birds.
One might also question the Chancellor’s claim to be taking a “balanced” approach.
When the fiscal forecasts got worse in 2016 and 2017 he didn’t cut spending or
increase taxes in response, he accepted more borrowing. But now they have
improved he has increased planned spending and maintained expected borrowing.
Keep doing that and the deficit can only go one way.
All that said, this is no bonanza. Many public services are going to feel squeezed for
some time to come. Cuts are not about to be reversed. If I were a prison governor, a
local authority chief executive or a headteacher I would struggle to find much to
celebrate. I would be preparing for more difficult years ahead.
The public finances
It’s important to put improvements in the forecasts in context. Yes they got better.
Borrowing this year is set to be £12 billion less than forecast in March. But that is still
nearly £30 billion more than was forecast in March 2015. Borrowing next year, after
the measures announced yesterday, is forecast to be £2 billion less than expected in
March this year, but £40 billion more than forecast in March 2016.
Equally don’t forget that borrowing has come down a very long way from its post
crisis peak at over £150 billion. It is now back below its immediate pre-crisis level and
its long-term pre-crisis average. It is too easy to get excited by this year’s changes
and lose sight of the bigger picture.
But what does explain the improvements which allowed the Chancellor space for his
largesse? Rather unexcitingly it mostly comes down to small scale improvements in a
range of forecast tax revenues. They keep coming in a bit better than expected and
the OBR has altered its forecasts to reflect that. It has also again reduced its view of
the likely long run equilibrium unemployment rate. And while the forecasting
changes were quite big for this year and next they were of a boringly average
magnitude into the medium term.
Of course all of these are estimates with a wide range of uncertainty around them.
What the OBR gives this year it can quite easily take away again next year. If it does
then the Chancellor will have painted himself into a bit of a corner. He’s going to
struggle to reimpose austerity having announced its end. Could he resort to sizeable
tax rises? More likely he would just allow borrowing to persist at a higher level.
And when considering the public finances don’t forget the debt. The deficit is down a
lot on its peak. Debt is not, it is 50% of national income higher than it was pre-crisis,
and it is set to fall only gradually – by about 3% of national income between now and
2023-24 once Bank of England interventions are stripped out. It is not on a decisively
downward path into the long run.
Spending
On the spending side there really is only one story in town – that’s the increase in
spending on the NHS. While spending on the NHS in England is set to be around £20
billion higher by 2023-24 than it is today, day-to-day spending on all other public
services is set to be essentially flat.
This is a long term trend and a big one at that. Health spending will have risen from
23% of public service spending in 2000 to 29% in 2010, and is set to reach 38% by
2023-24. That is a remarkable increase. Other public services have been paying the
price. At some point, we will need to pay more tax if we are to continue to increase
spending on the NHS like this.
Again some historical perspective is important. Total day-to-day public service
spending (RDEL) is 8% lower today than it was in 2009-10 and by 2023-24 it is still set
to be slightly lower than its 2009-10 level. RDEL outside of health is 19% lower today
than it was in 2010-11 and is set to stay broadly flat between now and 2023-24.
As for health, despite its favoured status, there is nothing particularly historic about
these announcements. Depending on exactly what you are measuring spending is
rising by between 2.6% a year (an estimate of total health spending increases
between 2017-18 and 2023-24) and 3.4% a year (NHS England RDEL between 2018-19
and 2023-24). That compares with average increases of 3.7% a year over the NHS’s
entire history, and a 6% a year over the period of the last Labour government.
Two other points to note on spending. First, Mr Hammond provided some small
relief for defence, social care and roads for next year. But that largesse does not
extend beyond next year. Small cuts in unprotected RDEL are still planned for the
period after 2019-20. This will still be a tough spending review.
Second, whilst capital spending is still set to rise and to reach a high level by historic
standards, Mr Hammond actually raided some of the increases he announced a
couple of years ago to pay for more day-to-day spending. Capital limits were cut by a
pretty chunky £7 billion for 2020-21. Mind you the OBR had assumed that most of
this would not have been spent in any case. To announce big increases in capital
spending, fail to persuade the independent fiscal watchdog that you are capable of
actually spending it, and then raid it a couple of years later, does not speak to the
highest quality of spending control and planning.
Social Security
There was one other significant spending pledge – to increase the generosity of
universal credit by increasing some work allowances, that is to increase the amount
most can earn before their benefit gets withdrawn. With some other changes
designed to smooth its roll out, this will increase planned spending on Universal
Credit by around £2 billion a year. For many people this increase in work allowances
will essentially undo the cuts announced by George Osborne in 2015 – though not
for the childless non-disabled. Their work allowances were cut to zero in 2015 and
there they remain.
These changes, on top of the cut in the taper rate announced last year, will help
“make work pay” for many recipients. They are just about enough to push the
expected cost (and hence generosity) of Universal Credit higher than the system it
replaces. But this is a small increase in generosity compared to the cuts to working
age benefits introduced since 2015 and it is small relative to cuts still to come in. Four
years of benefit freezes, and the ending of family premiums and of payments in
respect of third and subsequent children are a much bigger deal than this increase
in work allowances.
And as for UC becoming on average a slight giveaway relative to the legacy system
as opposed to a slight takeaway, that’s not really the point. It is a huge change quite
deliberately creating millions of winners and millions of losers. Something like a third
of working age households will be entitled to some UC. Of those around a third will
be at least £1,000 a year worse off under UC than under the legacy system while
about a quarter will be at least £1,000 a year better off. (Note that these are medium
term effects – it is not intended that people lose in cash terms as they move on to
UC.)
Tax
At a cost of about £1.4 billion in 2020-21 the income tax personal allowance will rise
to £12,500 and the higher rate threshold to £50,000. That will mean the personal
allowance will be 55% higher in real terms than it was back in 2010-11. Taking
account of offsetting cuts in the basic rate limit (the amount of taxable income you
need before the higher rate kicks in) this has come at a cost of over £15 billion a year
(£25 billion if you ignore those offsetting cuts). It means there will be nearly 6 million
fewer income tax payers than there would have been had the allowance only been
raised in line with prices since then. That’s one of the reasons why more than 40% of
adults pay no income tax in any given year.
The increase in the higher rate threshold is, on the other hand, something of a policy
reversal rather than the continuation of a trend. Even after this increase it will be
around 9% lower in real terms than it was in 2010-11 with the result that there will be
around 900,000 more higher rate taxpayers than there would have been had it risen
in line with inflation.
Of course these changes benefit the better off – though you only need £12,500 in
income to benefit from the personal allowance increase. On average they will benefit
over 30 million people by an average of around £44 a year, with the typical higher
rate taxpayer gaining £156 and the typical basic rate taxpayer gaining £21. Contrast
that with the changes to Universal Credit. They help far fewer people – about 2.4
million families – but help them a lot more, by over £600 a year.
There was a long list of other tax policies announced. The most important of these
were:
- A cut in business rates for small retailers;
- A temporary increase in investment allowances and an industrial buildings allowance;
- Changes to the rules governing the taxation of self employed contractors working for larger private companies;
- A new digital services tax.
My colleague Helen Miller will talk about all of these in more detail. Suffice to say at
this point that each of these changes represents no more than a short term sticking
plaster solution to some big underlying problems with the tax system.
To conclude
As well as looking at what was there, it is worth reflecting on what was not in the
Budget. It wasn’t just lacking firm spending numbers. The OBR listed 15 separate
policy “intentions” where firm policy is yet to be announced, everything from full
devolution of business rates to local authorities, to extensions of automatic
enrolment, to devolution of corporation tax to Northern Ireland. We still await a
social care green paper. We still await a plan on funding further and higher
education.
The tax changes that we did see all relate to real problems, but were all sticking
plasters rather than long term solutions to those problems. There was no indication
of a plan for future tax policy or for the all but inevitable tax increases to pay for our
ageing population.
