Will Tanner is Director of Onward and a former Deputy Head of Policy in Number 10 Downing Street.
The received wisdom in Westminster is that Philip Hammond will unveil a boring Budget on Monday. It will be, people say, a measure of both the man and the moment: the product of a Chancellor who is cautious by nature at a time when political capital is in short supply and economic risk appetite is low.
The Chancellor therefore has a rare opportunity to confound critics who accuse the Government of fiddling while Rome burns. He should grasp it with both hands and redefine the narrative to move on from the emergency task of clearing the deficit and set out a Conservative vision of long-term stewardship of a growing economy.
There is no better place to begin than where the Prime Minister left off in Birmingham. When Theresa May told party conference that “after a decade of austerity, people need to know that their hard work has paid off”, she was not rejecting conservatism but speaking a plain political truth. For the party to win in 2022, it can no longer be defined by its response to a fiscal crisis in 2010. It needs a positive economic offer that responds to people’s concerns today.
So, what are people saying they want? Is it more spending reductions in order to deliver tax cuts? Beyond international aid, there is scant support for reductions in any other spending departmental budgets – particularly the most expensive like the NHS or schools.
According to the British Social Attitudes survey, just four per cent of voters back lower taxes and lower spending, and support for increased tax and spend is at its highest level for fifteen years. Even a majority of Conservative voters favour higher taxes to support more spending on health, education and social benefits.
The question for the Chancellor is therefore not whether to end austerity, but how to pay for it. Higher taxes is one option, but clearly not one taken lightly. Instead, could we finance the public service improvements that people want by easing up on the deficit target, and using some of the fiscal headroom we have built up since 2010? There is arguably little point in fiscal perfectionism if all it does is gift a growing economy to a self-described Marxist Chancellor.
If this is what the Chancellor decides to do, there is room for manoeuvre. In the Spring Statement, the Chancellor had debt as a share of GDP falling by nearly eight per cent, by 2022/23, which amounts to around £180 billion less debt than if we did nothing – and just kept debt constant as a share of the economy. But as well as the question of how to handle our debt, we also have a target to eliminate the deficit.
Since the Conservatives came to power in 2010, we have cut Britain’s day-to-day borrowing from an astronomical 10 per cent of GDP under Labour to around 1.5 per cent today. Given 1.5 per cent is well within international norms, and lower than the UK average between 1948 and 2008, we should ask ourselves if the pain of further cuts is worth the risk of losing power. To my mind, it is not. A better fiscal rule would to focus exclusively on keeping debt falling, and debt repayments with it. Which, by the way, is something Jeremy Corbyn could never promise to match.
The Chancellor seems set to use some of the headroom it has to fund the substantial injection of cash into the NHS that the Prime Minister announced this Summer. But the Government could go further in the same direction, and use the headroom to help out in other areas that require urgent attention: money for prisons and violent crime prevention, for example, or extra funding for adult social care until a new long-term financing system can be agreed.
As well as giving the space to back Conservative priorities, a new approach would also reflect the reality that the new economic battleground is debt, not current spending. Having doubled in the last decade to 85 per cent of GDP, public sector net debt is now finally starting to fall under the Conservatives and will continue to do so. Labour’s plans, by contrast, would mean debt exploding to pay for the nationalisation of whole industries and an infrastructure programme worth a quarter of a trillion pounds.
Politically, debt is also a better dividing line. Few people understand the deficit. Every voter who has a mortgage, payday or student loan understands that more debt means higher costs of borrowing and a greater risk of bankruptcy, as well as greater costs piled on younger generations less able to pay.
But a new fiscal framework must be complemented with a new economic strategy to help boost Britain’s sluggish productivity rate and make the economy work better for everyone. Low productivity has long been a global phenomenon, but UK productivity has been especially weak – growing at a measly 0.4 per cent a year on average over the last decade – and remains well below the G7 average.
Kick-starting productivity will require bold steps. One option would be to remove Britain’s strict capital allowances for plant and machinery, perhaps for a limited period. This would also encourage firms to invest in productive technology and reduce their reliance on low-skilled migrant workers – both particularly useful as we prepare to leave the EU.
Extending these tax reliefs to human capital investment, which the Treasury explored earlier this year, could also mitigate the risk posed by widespread automation – helping companies to retrain UK workers into higher value roles.
As well as being a vote to leave the EU and control immigration, the Brexit vote was strongest in the areas that felt left behind and ignored. That’s one reason Conservatives now hold seats like North East Derbyshire, Walsall and Mansfield. In order to respond to those voters concerns, we need to find ways to get the private sector growing right across the country.
For starters, we should stop unbalancing the economy. The Chancellor should overhaul the Treasury Green Book rules which determine whether infrastructure projects receive public funding. It is the only way to close the productivity gap between the North and South of England, currently estimated at a whopping £4 per person for every hour worked.
It is frankly indefensible that London accounts for 13 per cent of the UK population and 23 per cent of GDP but receives 50 per cent of government funding for housing, and five times as much transport investment per head as the North East and Yorkshire and the Humber respectively. As the economist Diane Coyle recently put it in a paper for Cambridge University, “there is strong justification for tilting future public investment to other parts of the UK”.
The message of this Budget should be clear. The hard work has paid off, now let’s deliver for the long-term. For the first time since it came to power eight years ago, the Conservative Party has an opportunity to move on from austerity and to embrace a positive plan for balanced prosperity. If the Chancellor grasps it, it will be a very exciting Budget indeed.