03 November 2017

The Government - along with the Chancellor - finds itself in a tricky political position ahead of this month’s Budget. The politics make it inevitable that many key decisions will be fudged, argues Julian McCrae.

In this month’s Budget, the Chancellor faces five major problems and has little room for manoeuvre. While a lot of fudge and a little Houdini might get him through this Budget, there are still steps the Chancellor can take that will leave the Government better prepared for the challenges ahead.

Problem one: The Government lacks vision

Given the open civil war in the Cabinet and the Chancellor’s role as one of the leading combatants, the Government will not be able to provide the desperately needed vision for a post-Brexit Britain.

The Chancellor instead needs to concentrate on setting out a better plan for how the Brexit essentials - immigration, customs and staffing levels at key departments like Environment, Food & Rural Affairs (Defra) - will be funded.

The Chancellor also needs to clarify the political vision behind his tax and spend policies. George Osborne’s austerity politics gave a rationale to his approach. His overriding message was that government had to urgently cut its borrowing and this was a national task - we were “all in it together”.

That message has been eroded. The 2017 Conservative Manifesto put off the ending of borrowing to some point in the mid-2020s. And the cuts are now focused on those on lower incomes, particularly through the roll out of Universal Credit, an ongoing nightmare for both the people involved and the Government’s public relations.  

The Chancellor must provide another vision than pulls together the Government’s tax and spending policies – even if that is just a return to Osborne’s austerity politics.

Problem two: The Chancellor can’t raise taxes

Any attempt to rebalance the pain, for example through further reductions in pension tax reliefs for higher earners (a favourite policy of George Osborne), would be a huge political gamble. With no majority, and some of the Chancellor’s colleagues already briefing they will use the Budget to bring him down, this would be the political equivalent of handing a loaded gun to your enemy and hoping they don’t use it. The Chancellor is likely to be confined to introducing tax avoidance measures.

This is an area where the Chancellor needs to prepare for the future. In this Budget, we hope to see the outline of a strategy to develop the tax system. He should also launch a series of reviews, laying the groundwork for future reforms.

Problem three: The borrowing forecasts are getting worse

The Office of Budget Responsibility (OBR) is going to produce numbers that will make life worse for the Chancellor. It already announced its going to reduce its forecasts on productivity growth, putting a huge hole into the public finances that will keep getting bigger over time.

But there are timing issues the Chancellor can exploit. The borrowing numbers for this year (2017/18) actually look better than forecast. And depending on the size of the OBR revisions, it’s possible the Chancellor will face better numbers for the next year or two.

So the Chancellor may well be able to fudge by cutting taxes and raising spending in response to the good news relating to the next few years. And his fiscal rules probably give him enough wriggle room to cover the longer-term bad news by allowing borrowing to rise.

Problem four: The Industrial Strategy needs to be fleshed out

We can expect a lot of announcements about the new Industrial Strategy. The big money is likely to go on infrastructure, one of the few areas in which this Chancellor likes to spend more. A substantial package on house building looks like a certainty.

How well the Government decides where money is spent, rather than how much the Chancellor commits, will be the issue.

He will not want to add to the huge amounts of capital spending tied up in mega projects of dubious value

The Industrial Strategy should not add to the policy churn that has blighted key areas of economic policy. For example, further education has seen 28 major pieces of legislation in 30 years, and no national-level institution has lasted more than a decade before being abolished. 

As a basic rule of thumb, the more measures the Chancellor announces, the less effective the overall package is likely to be.

Problem five: The Government needs to escape the crisis, cash and repeat cycle in public services

The Government is trapped in a reactive cycle on public services, allowing performance and political pressures to build up and then being forced into emergency cash injections to keep services going. It is spending £10bn over five years in this way. And this extra money is not being used to sort out the underlying problems these services face.

In prisons and hospitals, the Government has got itself into such a tight corner that it has to put in more money, whether up front (the better option) or down the line. In schools and adult social care, the Chancellor has committed to emergency cash injections. But these sticking plaster solutions have a time limit and fundamental changes take years to implement.

The Budget needs to start preparing the ground for genuine changes to the way these services are funded and delivered.

There are signs that the Government is trying to break out of this reactive cycle. Liz Truss, the Chief Secretary to the Treasury, recently set out some high-level principles that could underpin this new approach. The Budget needs to translate these principles into tangible actions.