David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election.
Rishi Sunak’s first Budget speech set out ‘temporary, timely and targeted’ measures to address the coronavirus crisis, as well as highlighting the ‘coordinated, coherent and comprehensive’ action taken by both the Government and the Bank of England. It was a speech that was assured, accomplished…and alliterative.
To some extent, the Chancellor delivered not only his first Budget but also his second. The first was an emergency Budget responding to COVID-19. It was substantial and well-judged, focusing support on those businesses and individuals most likely to be affected by the tumultuous months ahead.
Getting help to those who need it quickly is not easy. There is a trade-off to be made between ensuring the money is well-targeted, but also happens in the spring and summer. The perfectly directed measure that takes effect in October is not of much use. By and large, the Chancellor found ways of the delivering this. It is more than likely that he will have to announce new measures in due course, but this was a very good start.
The second Budget speech set out where the Government is going to go over the course of the Parliament and, in particular, the spending plans. This is where the controversy lies.
Two points to make in support of the approach taken by the Chancellor. First, this was a Budget that delivered on the 2019 manifesto. No one can claim to be surprised that this would be a Government that was prepared to turn on the spending taps. In terms of tax rises (and the Budget contained plenty of tax rises), these were broadly set out in advance. Corporation tax being held at 19 per cent and changes to Entrepreneurs Relief were well flagged.
Second, there is a case for more spending both in respect of capital spending and current spending. It is undeniable that there are lots of genuine pressures on public spending. Many areas have seen substantial real terms reductions and the strains are showing.
Other areas, like health, face significant pressures caused by demography and rising expectations. Maintaining very tight spending constraints is probably not realistic – especially given the new coalition of supporters the Conservative Party attracted in December. In other words, it is not unreasonable or politically unwise to increase spending.
Nonetheless, this is a departure from Conservative orthodoxy. These are rapid increases in spending, significant increases in borrowing and will leave the size of the state at its largest level since the late 1960s.
It may be worth reminding ourselves of the arguments made in the 1970s and ‘80s about the perils of Big Government. It was a time when the power of Government was used to protect the interests of producers not consumers. Inefficient, lame duck businesses were sheltered from competition. Public spending was directed on the basis of political priorities rather than long term economic benefit. Tax policy was internationally uncompetitive and hostile to enterprise.
If there was a downturn in the economy, borrowing and spending was seen as the answer. It was an approach that left the UK as the sick man of Europe – uncompetitive, inefficient, undynamic and our public finances unsustainable.
Of course, it is perfectly possible to have a relatively large State and avoid a return to the miseries of a pre-Thatcher British economy. But, given that the UK has never managed that before, how do we avoid a return to relative decline?
First, the public finances. I share the concerns of the Editor of this website in worrying about boasts of how extra spending will boost growth. In reality, this will just be a short-term sugar rush to the economy, not a basis for sustained prosperity. It is an argument made by the Chancellor that concedes too much ground to those who think that we can borrow our way to prosperity.
To be fair, he has stayed within the constraints of the fiscal rules but this underlines how loose those rules were. This also assumes that the economy grows in coming years and the fall in debt as a proportion of GDP is very small and dependent upon a contribution from financial repayments to the Bank of England that really should not count. In other words, our debt levels are stable in relatively good times, but they will soar if we hit bad times.
Many will argue that the Government can borrow very cheaply and that the long maturity of our debt gives us some comfort. Both points are true, and the Government has greater flexibility than was available to George Osborne in 2010. But the argument that “this time it’s different” is a familiar one, and doesn’t always stand the test of time. The fiscal strategy is high risk.
As far as spending is concerned, the tendency of the Government up until now has to be to focus on the inputs (the extra spending, police officers, hospitals etc.) rather than the outputs. This may be a sensible communications strategy but good government will require the focus to be how this money can be spent most effectively to improve outcomes.
The risk of wasting public money increases when the amount of money being spent is increased rapidly. The capital budget, in particular, is rising rapidly. It is vital that the focus of the Government is to obtain good value for money not just getting the cash out of the door.
Assuming that there is some degree of fiscal responsibility, there will also be a need to think seriously about tax policy. If we are going to need to raise a lot of money in tax (and we are), this needs to be done in a way which improves the efficiency of our tax system and minimises damage to our capacity to create wealth. There are many pressures driving tax policy in the wrong direction.
Finally, a word about economic growth. Supply-side reforms are necessary – including sensible use of the new infrastructure funding. Making our economy more open to foreign competition and investment helped us enormously in the 1980s.
Unfortunately, this country will move in the opposite direction with trade barriers being erected with our biggest market, reducing our productivity by four per cent in 15 years, according to the Office for Budget Responsibility. A wise Chancellor should ensure that the process of Brexit is no more damaging than it has to be for our productivity.
In summary, this is clearly a Government that is committed to higher levels of spending. What is not yet clear is the precise balance between higher borrowing and higher taxes. Nor is it yet clear how the Government will ensure that taxes are raised sensibly and that public money is spent wisely. For the answers to those questions, we will have to wait at least until the autumn. It will be Rishi Sunak’s task to ensure that Big State Conservatism can be a success.