Big Money and Small

The Chancellor – on reviewing his press after the Budget – was asked whether the £600 million a year he expects to get from higher National Insurance on the self employed was worth the controversy it has stirred. He shifted small sums of money around in the budget compared to the totals, offering a little extra spending here and taking a little bit more in tax there. His aim was a neutral unflashy budget with just a few technical changes.

It turns out technical changes can be more political than he realised.

The budget reviews a large enterprise, the UK state. It costs £800 bn to run next year, so taking around £600 million more in tax from 2019-20 is less than 0.1 per cent of the total. The problem is that some fear it could have an adverse impact on the very flexible and innovative workforce that constitute the self employed. The biggest item in the Budget was a £1200 million one year increase next year in social care spending, weighing in at 0.15 per cent of the total. This will be most welcome to local government and families around the country, though it comes after Councils have set their Council Taxes for the new year and have boosted inflation by putting them up to deal with the accelerating costs of care. There was a small boost of £250 million for the NHS to promote reform of service delivery, and some relief for those facing high increases in their Business rates bills. Councils will be able to draw on a fund to compensate the worst affected.

Big money did move around in the budget, but it was moved around by the forecasters, not the Chancellor. It is almost unbelievable that the official forecasts for additional borrowing in the year to March 2017 are now £16.5bn lower than in the Autumn Statement issued in November. In other words, the official forecasters had such a distorted view of the UK economy this winter that they understated the revenues massively, and overstated the spending, because they expected a sharp slowdown in our growth rate. I argued at the time that the UK economy was not going to slow down this winter, and urged them to stick with their March 2016 forecasts which were reasonable and sensible. Instead the official forecasters went exceptionally gloomy immediately after the Brexit vote, and failed to cheer up enough by the time of the Autumn Statement. It was a good job the Chancellor did not move to major spending cuts or tax rises in the Autumn to combat the alleged large rise in the deficit that the forecasters wrote into their script.

There is a serious problem for Ministers when the forecasts are so unreliable. There is the danger that policy will be made to lurch in response to entirely erroneous figures.

The Budget speech was also interesting for what it left out. Anyone looking at the UK economy today and seeking to forecast it tomorrow would be wise to start with an analysis of the impact of loose money, ultra low interest rates and the continuing Quantitative Easing (QE) programme. That swamps the Chancellor’s measures in terms of the financial scale of the intervention. I assume there will be no more QE after this latest large burst, where an additional £70 billion has been created or is planned. The Bank needs the Chancellor’s permission to print money to buy bonds, so clarification on this will be needed soon. The decision by the Bank to cut UK interest rates to 0.25 per cent from 0.5 per cent last summer leaves the UK exposed compared to the USA. There interest rates have been lifted from 0.5 per cent to 0.75 per cent with further rate rises likely, starting next week. The Office for Budget Responsibility accepts that exchange rates are partly driven by interest rate differentials, so a widening gap between UK rates and US ones as assumed by the OBR also produces a further small downward movement in sterling in their forecast.

The official forecast now believes real incomes will be stable this year and rise thereafter. They expect inflation to reach 2.4% on the CPI this year and then to subside a bit. So far the rise in prices from the lows has been led by the rising oil price, and is a feature the UK shares in common with the USA, Germany and other leading economies. These forecasts are less wild than the immediate post Brexit downward revisions which many forecasters undertook, based on a surge in price inflation, a fall in real incomes and a decline in investment by companies.

The Chancellor made much of the debt issue, but here the figures are a bit more reassuring. Most commentators fix on the gross debt figures. I look more at the figures net of the debt the Bank of England has now bought up on behalf of taxpayers. If you exclude this debt where the taxpayer gets the interest payments back from the Bank the UK’s state debt is quite modest by world standards. The gross interest on state debt at £55.8bn is brought down to £41.5bn by the interest payments on debt the state owns itself. This level is just 2 per cent of GDP or 5 per cent of state spending. What we need from here is to grow the economy and raise productivity. This will boost real incomes and tax receipts. The government is working on a productivity plan. It would be well advised to apply its findings to the public sector, where productivity performance has been disappointing in recent years.

Sir John Redwood MP

Sir John Redwood has been Member of Parliament for Wokingham since 1987 and is a former Secretary of State for Wales, having held a variety of ministerial roles in the 1980s and 1990s. A former Head of Margaret Thatcher's Policy Unit, he is Chairman of the Conservative Parliamentary Economic Affairs Committee and wrote We Don’t Believe You: Why Populists and the Establishment See the World Differently (Bite-Sized Books, 2019). His Politeia publications include How to Take Back Control: Trading Globally Through the WTO (2018) and Trading Truths: The Treasury, Trade and the City (2016).

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