The need to eliminate the structural deficit has not gone away – and nor have the Government’s plans to meet the challenge, despite Philip Hammond’s postponement of the date by which this will be achieved. The Chancellor now proposes to do so by “as early as possible in the next Parliament”, rather than achieve a surplus by the end of this one.
But he may not meet his goal any more than his predecessor was able to gain his. The Conservative Manifesto of 2010 pledged “a credible plan to eliminate the bulk of the structural deficit over a Parliament”. George Osborne made good progress on that goal, but was only able to cut the deficit by half (measured as a proportion of GDP). The Institute for Fiscal Studies believes that Hammond will also fall short, maintaining that sharper cuts to the rate of growth of public spending, and higher taxes too, are likely if he pushes for his target: “if the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”
Furthermore, the Chancellor will not find it easy to make the reductions and rises that he is already planning. The gathering storm over business rates is a classic illustration of the problem. On paper, the Government’s plan is nothing to do with balancing the books: rather, it is simply a revaluation (and an overdue one at that). In practice, the move is an integral component of Hammond’s deficit reduction plan – raising £1 billion or so next year, for example.
However, it will hit high streets in some prosperous constituencies. The Chancellor will say, rightly, that the revaluation will see more winners than losers, especially in the Midlands and the North. He will point to the confirmation in his Autumn Statement of a business rates reduction package. He will argue that due to Government action 600,000 small firms are paying no business rates at all. None of this is likely to cut much ice with Conservative MPs in well-heeled seats whose businesses will be hit.
The high street, smaller shops, rising costs and angry backbenchers are a toxic combination for Tory Governments – and have been ever since Edward Heath drove through the abolition of Retail Price Maintenance, if not before. The palaver over the proposed revaluation will be all the noiser because of inherent problems within the system. It catches schools and surgeries as well as shops and salons. And there will always be controversy over whether rateable value is calculated fairly. (For example, the quality of rooms is a factor in assessing rates for hotels.)
Hammond is under pressure not only from some Conservative MPs but also from a business coalition, including British Retail Consortium, the CBI and the Federation of Small Businesses. He is not helped by headline-grabbing illustrations of some smaller businesses in richer areas being due a rise while some larger businesses in poorer areas are due a cut – Amazon, for example. The Treasury insists that there will be no concessions. But the Chancellor will doubtless find some way of sweetening the pill in next month’s budget.
Business, however, will still have to swallow it – at least if Hammond is to have any chance of keeping his deficit reduction plan on track. Here comes the crunch. The 2015 Tory Manifesto ruled out many of the structural changes to public spending that would help the Chancellor get the budget back into balance – such as ending the pensions triple lock. Nor has the Government a Commons majority for radical action in any event. To his credit, Hammond has indicated that he wants the pledge to protect the lock and aid budget ring-fencing abandoned in time for the 2020 election. To be consistent, he would have to chuck in NHS budget ring-fencing too.
A combination of that slender majority and the coming Brexit mean that this is not the time for a big cut in the rate of public spending. But we cannot travel for much longer down the path we are treading: the tax burden is due to reach its highest level for 30 years.
During the run-up to the Budget, this site will be probing some of the big spending challenges, including the biggest of all: namely, the relative protection of older richer retired people compared to younger poorer working people. Theresa May has little room for manoeuvre now. She must find more during the run-up to her 2020 manifesto.