07 March 2017

With the last Spring Budget taking place tomorrow, Julian McCrae suggests a few areas to watch if you want to make an informed judgement about what’s actually happening.

Over the last 20 years, Budget statements have become increasingly difficult to decipher, with Chancellors obscuring their decisions behind opaque and often deliberately misleading statements. It’s possible Philip Hammond will reverse this trend and return budgets to a ‘what you see is what you get’ state. But just in case, there are a few ways to decipher tomorrow’s Budget.

Check Hammond’s ‘re-gifting’ ratio

The Chancellor is expected to receive a ‘gift’ of several billion from the Office for Budget Responsibility (OBR) as its economic forecasts improve. What will he do with it? His comments at the weekend about ensuring there is “gas in the tank” suggest he will hang on to it in order to strengthen the public finances. But speculation (and some effective announcements via the media) about more money for social care, schools and business rate payers, gives the opposite impression.

To tell what’s really going on, calculate the Chancellor’s ‘re-gifting ratio’: how much of the OBR’s extra money (the gift) will be passed on in spending increases or tax cuts. When former Chancellor George Osborne was gifted £27bn over five years by the OBR in Autumn 2015, he re-gifted 70% of it (the ratio can be quickly calculated from the forecast changes table in the OBR’s Economic and Fiscal Outlook). Let’s see if Hammond is really much more cautious than his predecessor.

An end to ‘initiative-itis’?

Budgets and Autumn Statements have contained more and more measures over the years.

Number of tax measures

These measures tend to be half-thought through, and all too often unravel as soon as they are put to any real test. This is one of the key reasons why we, along with the Institute for Fiscal Studies and the Chartered Institute for Taxation, called for Philip Hammond to move to one major fiscal event a year – a recommendation he has accepted.

But if budgets are to become more strategic then it would be good to also see fewer changes. A quick check on the Budget scorecard (the list of measures the Chancellor has announced, usually Table 2.1) will reveal whether ‘initiative-itis’ is continuing or not; if it’s below 40 tax measures then Hammond is starting to really make a difference.

Preparing Whitehall for Brexit

There is a long way to go before the exact financial implications of Brexit become clear, creating a series of tricky forecasting problems for the OBR. We may also see some extra spending on some of the departments more directly affected: the Department for Education, Food and Rural Affairs needs a UK-specific replacement for the Common Agricultural Policy; the Home Office will need a new immigration control regime; or a new customs system for HM Revenue and Customs.

All these departments face steep cuts to their funding as a result of Osborne’s 2015 Spending Review.

Change in budgets by department

Will the Treasury’s instincts to control spending regardless of the consequences dominate the need for departments to have some clarity about the financial envelope in which they have to prepare for Brexit? The revised departmental expenditure limits (DELs), usually found in Table 2.4 or 2.5 of the Budget document, will provide some insight. Will the key departments’ budgets have any extra money for Brexit?

Rebooting the approach to efficiency

Aside from Brexit pressures, the Government is struggling more generally to implement the 2015 Spending Review, as we chronicled in our recent Performance Tracker. They are bouncing from crisis to crisis, already forced to put emergency cash into prisons and adult social care. It looks like the latter may get yet a further injection of cash tomorrow.

But the key question is not the amount of money the Government puts into stressed public services. It is whether can find ways to get back to the virtuous situation post 2010, when spending was being controlled while the scope and quality of services were maintained. This will take much more than simply telling departments to live within their needs.

Watch for any evidence that the Government is prepared to face up to the really difficult issues involved in such changes, in the same vein as the excellent appointment of Sir Michael Barber to lead part of the Government’s Efficiency Review. Inevitably it will take much longer than a few hours to judge whether such announcements will lead anywhere, but it’s important (both for the public and for itself) that the Government shows renewed seriousness about improving the efficiency of public services.