Five Suggestions for the Spring Budget
Nobody expects this to be a major Budget.
Despite being supposedly the last ever Spring Budget, it seems unlikely that the Chancellor will choose to commemorate the occasion with any blockbuster changes or final, dramatic, rabbit in the hat moments. Instead, major changes are likely to wait until the first event in the new Autumn timeslot. This Budget would likely not even exist if it were not for the legal and organisational difficulties in instantly switching timetable.
The surprising resilience of the UK economy has helped tax revenues exceed the OBR’s recommendations, with the independent body forecasting that the deficit is on track to undershoot its November forecast by £12 billion this year.
However, the Chancellor is unlikely to want to bank much of this. While consumer spending has helped maintain demand, many economists, and some in the Treasury, worry about the potential impact of higher inflation feeding through into retail prices, or ongoing uncertainty from the inevitable twists and turns of the Brexit divorce negotiations.
Whether this slowdown actually takes place is a real question — the economy is, after all, still doing much better than most expected — but the Treasury is right to stay cautious until we know more.
Nevertheless, where there is unlikely to be major cash to splash around, there are still a few useful things the Treasury could do.
Here are five potential ideas for the Chancellor:
1) Keep reducing the structural deficit by 1 per cent of GDP a year
Given the significant economic uncertainty, last autumn saw the Chancellor replace the former fiscal targets with a new set with much greater room for manoeuvre. The downside of such flexibility is that it significantly delays the point at which the deficit will finally return to balance, increases overall debt, and extends the possibility that we run headlong into another recession or long-term spending pressures. Brexit should be not used as an excuse for unnecessarily worsening long-term public finances, or avoiding hard decisions.
While it is too soon to call the all clear on the economy and return to more aggressive previous deficit targets, there is a good case for using any positive surprises on the tax-revenue side to reduce the deficit faster than the Chancellor’s relatively unambitious timetable. A good target would be to aim for the IMF’s rule of thumb for fiscal contraction — reducing the structural deficit by around 1 per cent of GDP a year.
2) Make the Efficiency Review an annual event
The Government has confirmed that it is asking individual departments to find an additional £3.5 billion in annual savings by 2019-20, with £1 billion of that to be re-invested back into public services. For context, £3.5 billion represents just over 1 per cent of controlled departmental spending (DEL) in 2019-20.
However, while the review is a good idea, the process of seeking efficiencies shouldn’t be seen as a one-off last resort, completely divorced from the separate process of budget allocations. Seeking efficiency should be a continuous, evolving, and transparent process, with annual audited updates reviewing progress so far, explaining how these changes align with more strategic Single Departmental Plans and what scope there is for future efficiencies, innovations, and service improvements on a rolling basis.
This will only become more important as concerns grow that badly-managed cuts are starting to affect the quality of public services. The Government will have to become better at showing its work.
3) Increase the Personal Allowance with earnings, but hold off on further increases for now
As important as what you do, is what you don’t do.
The 2015 Conservative manifesto committed to raising the Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 by the end of the Parliament. In principle, manifesto commitments should, by default, be met, unless there are very strong, countervailing reasons.
However, given the continuing uncertainty over the economy and the implied knock-on effects for the public finances, such broad-based discretionary tax increases should be postponed for at least this year, with any tax relief much more focused. By Autumn 2018, we are much more likely to be in a position to know what tax changes are affordable.
4) Consider commissioning an overall strategic review of the tax system
The Government has sensibly signalled that it is likely to offer some transitional relief to help those most affected by the upcoming large revaluations in business rates, and the size of the changes has also led many to call for a review of the whole system, and look at how its rationale and fairness has been altered by wider digitisation of the retail economy.
This comes on top of other calls for the Government to consider how income tax and national insurance may be distorting the choice between employment and self-employment; the possibility for widespread reform and simplification of VAT post-Brexit; the expected long-term decline in fossil-fuel-based duties; and continued international competitive pressure to keep reforming and lowering Corporation Tax.
There may be good reasons to keep reforming all these taxes piecemeal and separately, but given the breadth of the suggested changes, there is also a good case for considering a one-off, strategic look at the overall tax system. This could set out some guiding principles for creating a simpler, smoother, and more coherent tax system, alongside a long-term roadmap for the appropriate evolving balance between different taxes in future.
5) Don’t slip back into holding two Budgets
By their very nature, many worry that Budgets encourage some of the worst habits in policymaking: gimmicky, short term-ism, based on expected headlines rather than evidence or consultation. There is no good reason why so much detailed policy needs to get bundled into the same fiscal announcement — or, for that matter, why the Chancellor gets special access to the OBR’s preliminary forecasts ahead of everyone else. (Although my colleague Warwick Lightfoot disagrees, arguing that Budgets can provide a useful moment of theatre in the run up to an election.)
Some kind of Budget is probably unavoidable, but one of the new Chancellor’s best early announcements was that in future there should only be one real Budget a year, rather than the two to four we had slipped into.
The obvious danger is that by maintaining a separate ‘Spring Statement’, the Chancellor’s good intentions will eventually erode away as ‘just one more’ micro policy keeps being added — slowly building up the equivalent of what programmers term ‘cruft’, or badly designed and unnecessarily complicated policy. In order to avoid this, he should tie his hands, commissioning now an independent review of the Budget process to report in 2019-20 on how well the process is working.