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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
On the eve of World Book Day, it is perhaps fitting that Jeremy Hunt, Britain’s chancellor, was forced into writing a bit of fiscal fiction. Caught between political pressures to boost his party’s popularity and the country’s fragile public finances, he managed to confect a spring Budget that cuts taxes, meets his fiscal rule and makes a start on some sensible reforms. The problem is that he has had to stretch economic reality in order to get there.
The chancellor’s headline measure — and intended vote-grabber — was a 2 percentage point cut to national insurance, at a cost of £10bn per year. Beside a few small tax rises elsewhere, the giveaway is funded in part by higher borrowing. But to make the numbers add up Hunt is also relying on unrealistic spending plans, which could involve unspecified future cuts to already strained public services.
The plans leave the country with a historically tiny £8.9bn of “headroom” against the chancellor’s rule to have debt as a share of the economy falling within five years, according to the Office for Budget Responsibility. That figure is highly sensitive to changes in growth, inflation and interest rate forecasts. It also relies on future revenues from annual fuel duty rises that the Conservatives have perpetually cancelled. It is likely that some of Hunt’s measures will need to be reversed by the next government.
The cut to NI will put money back into the pockets of workers who have suffered a severe cost of living squeeze. But it is ultimately a wasteful use of the UK’s tight public finances. With tax thresholds having been frozen for years, the ratio of tax to gross domestic product is still expected to hit its highest since 1948 in 2028-29. At least Hunt managed to fend off pressure to cut income taxes. The NI cuts are cheaper, and help to raise the labour supply.
Surveys suggest many voters would have preferred a better deal for strained public services. Hunt maintained growth in departmental spending at 1 per cent per year in real terms. But unprotected services could still face real-terms cuts of about 3.3 per cent per year, according to the Institute for Fiscal Studies. The chancellor’s focus on boosting public sector productivity is the right one, particularly for the NHS, but there is no guarantee that it will deliver the ambitious savings he hopes for.
Hunt did, however, launch some worthwhile reforms. Raising the threshold at which parents begin to lose child benefit, and aiming to make it fairer in the long term, was smart. Overhauling tax rules for “non-doms”, or wealthy non-domiciled UK residents, was long overdue, if a risky move that could prompt wealth creators to leave the country. A new form of individual savings account may also help channel more investment into UK equities.
Had the chancellor not absorbed his wriggle room with the NI cut, he would have had more space to build out these measures and propose other policies to boost productivity. He could, for instance, have widened the scope of research and development tax credits or dedicated more to public sector investment. Indeed, the OBR’s estimate of the UK’s potential output growth remained broadly unchanged, despite his efforts with NI cuts. Raising it will be crucial to drive up long-term revenues, without raising taxes.
That Hunt met his debt rule, with the help of some fiscal gymnastics, serves only to show how much budget rules and processes need rethinking. Britain’s public finances remain on shaky ground. An ageing population will intensify the spending demands on health, social care and pensions, and geopolitical instability will put pressure on defence spending. Rishi Sunak has claimed his government would make “tough decisions” for the country’s long-term interests. There is only a little evidence of that in this electioneering budget. It mostly passes the buck to the next government.
