Today is the day politics nerds around the country have been waiting for: the Budget/Spending Review double whammy. It comes after a grim couple of years for the British economy, but you wouldn’t think it listening to our bouncy Chancellor Rishi Sunak. He talked a good game this afternoon about how well everything is going – ‘Jobs up! Growth up! Debt down!’ and so on. And it is true that the Office for Budget Responsibility have revised up their UK growth forecasts and revised down their projections on the impact of Covid. This is all very welcome.
However, the essential context here is that these improvements are coming from a very low base. The pandemic ripped through the country like a wrecking ball and a cost of living crisis and a desperate NHS in its wake – not to mention the huge financial costs of measures to get us through it, like furlough. As a result, the Government has faced pressure to invest, pressure to get borrowing under control, and pressure to cut taxes all at the same time. Doing all these things together is impossible. There are just too many competing political and economic demands. Picture the British economy like a mattress with a too-small bedsheet. As soon as you pull the sheet over one corner, the other comes undone, no matter how many times you frustratingly try and cover them all and hold it in place.
Faced with these mutually exclusive paths, the Government today has backed investment, with their renewed shift away from austerity marking one of the most significant changes in economic policy from a ruling Party in many a year. Total departmental spending is up £150bn overall, and a whole package of spending measures were announced, including on schools, infrastructure, and welfare. Sunak boasted of extra cash in his Treasury wallet as a result of recent economic growth, but that will not pay for all this on its own. With Corporation Tax and National Insurance tax rises coming into force, the Government are raising money through taxation, like good Keynesians. Lady Thatcher would not be pleased.
However, Sunak did unveil some tax freezes and cuts today, which will serve as red meat for his Conservative base. Business Rates were cut for the hospitality industry, fuel duty was frozen for another year, and Air Passenger Duty was cut for domestic flights – (something green critics will frown at, just days before we host an international climate conference!)
Sunak also padded out his tax and spend budget with rhetoric about how this is not actually what he wants to be doing. He claimed it is his ‘mission’ to be cutting taxes by the next General Election. It is a big ask, and shows Sunak knows where the Conservative Party could become vulnerable in the future. Right now, even true blue Conservatives generally appreciate that investment is needed, both to rebound from the pandemic, and to fulfil manifesto commitments on things like levelling up.
But as the years tick by, pressure will mount on the Treasury to show that the economy is balanced, and borrowing and taxes are not out of control. Today we are still in spend mode, but for tax cutting fiscal Conservatism, there is (some) jam tomorrow.