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FLIGHT Howard 2

Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.

George Osborne had a difficult task to make much of this Budget, essentially because weaker economic growth and financial market turmoil have created a £56 billion hole in the public finances, more than wiping out the £27 billion fiscal windfall he banked in the Autumn Statement.

There were good things in it, such as the increase in the ISA allowance to £20,000 a year, and the introduction of the new Pension ISA, giving the public the opportunity to vote with their feet on whether they prefer this or traditional pension saving arrangements.  The expansion of Business Rate Relief and its doubling for SMEs were particularly welcome.  Reducing Corporation Tax to 17 per cent should both increase the attractions for basing businesses in the UK and soften the blow of the loss of interest tax relief on “corporate” over-borrowing in the UK to fund overseas activities.  The reduction of Capital Gains Tax to 20 per cent was also a very welcome and sensible measure and should increase CGT tax yields.

But there were also some undesirable measures in the Budget. Our tax system is complicated yet further with the introduction of different (higher) Capital Gains Tax charges for property gains versus other assets; and bu limiting the offset-ability of past losses sustained in the financial crisis against more than 25 per cent of subsequent taxable profits.

The Government has also had to face up to the £5 billion black hole in public sector pension financing, which will require an extra £2 billion per annum subsidy from 2019.  At the time of the public sector pension legislation, several of us warned there would be a significant public sector pension black hole to finance by 2017.  It is inherently unfair that the public, whose pension provisioning has been badly hit over the last two decades, is now having to pay towards generous defined benefit, public sector pensions.

As I have written before, Osborne has done well to revive the economy.  But the biggest issue now, which he has fudged, is the significant worsening of the public finances resulting from lower growth projections.  The £10.4 billion surplus pledged for 2019/20 is little more than a ‘Gordon Brown style’ accounting gimmick.  It requires a £30 billion improvement from the previous year (2018/19), for which the Office for Budget Responsibility anticipates the public sector will borrow £21.4 billion.

To achieve this surplus depends on shuffling spending out of the fiscal mandate year and shuffling receipts into it.  The Government is still borrowing over £72 billion this year, eight years after the financial crisis, and public sector debt has risen to £1,591 billion.  It is obvious that the main areas of spending – Welfare at £240 billion, Health at £145 billion and Education at £102 billion will have to be constrained at some point.  The total figure for welfare spending, including tax credits and welfare items within transfer payments is, moreover, of the order of £270 billion.  Debt interest has already risen to £39 billion a year and, as and when artificially low interest rates come to an end, will increase substantially.

Iain Duncan Smith’s commitment to get people into work is to be praised and has protected large numbers of people from being thrown out of work post the financial crisis.  But, looking forward, taxpayer subsidy of those in work has to be phased out.  It serves to put downward pressure on pay and encourage over-employment – a major cause of poor British productivity.  It is a nonsense that many working 16 hours a week and receiving substantial income tax credits enjoy a similar overall income to many working 40 hours a week.  The Universal Credit is a good idea from an administrative perspective, but I believe that the Income Tax Credit element needs to be phased out.

Twenty years ago, the NHS cost some £18 billion p.a.; it is astonishing that this has now risen to that £145 billion.  It is simply unaffordable for it to continue to rise at this sort of rate.  I suggest that the Government should consider importing elements of the French health system.  It would not be unreasonable to have a £20 charge for GP visits, or for people to pay towards their board and lodging when in hospital.  The NHS has two major problems: first, that medical advances add constantly and expensively to costs and, second, that free goods have unlimited demand.   There is also going to have to be some element of rationing of healthcare in the future, but none of the political parties is, understandably, willing to risk the unpopularity of addressing this.

There is arguably a better case for the increase which has occurred in education spending, and which is in effect an investment in the future. But, given the substantial increase over the last decade, there needs to be at least an analysis of where all the extra spending has gone and what has been effective.

The bottom line is that putting the public finances into order must now be the economic priority.  The debt burden on future generations is already far too high at £50,000 per person in work.  The scope to raise more in taxation without damaging the economy is extremely limited.  The easiest solution is higher economic growth, automatically both increasing tax revenues and constraining government expenditure – but there is little or nothing the Government can do to increase economic growth.  Indeed, excess government spending is arguably reducing growth and, combined with our inadequate savings rate, also causing the UK to have an unsustainable, external current account deficit posing sterling risks to the economy.

The bullet of constraining public expenditure in the three largest expenditure areas – now accounting for nearly 70 per ent of total public spending – Welfare, Health and Education – will have to be bitten at some stage.  Typically, this should be implemented at the early stages of a new government, in the wake of a general election.  It has been ducked, which I believe will prove a mistake longer term.

55 comments for: Howard Flight: We simply cannot afford to carry on protecting spending on welfare, the NHS and schools

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