Say what you like about Kwasi Kwarteng, and by now most people have, but he certainly put on a show. Last September he announced an ambitious plan to make the UK’s debt unsustainable, allowing hedge fund managers to short the plummeting pound. By October he’d announced an ambitious plan to seek new employment opportunities elsewhere. His successor as chancellor, Jeremy Hunt, made it his first priority to be as boring as possible, and today’s spring Budget was well telegraphed to the same financial markets that sealed Kwarteng’s fate.
But while the UK’s short-term finances have improved, partly thanks to a relatively mild winter that has reduced the cost of energy subsidies, the future that Hunt is trying to chart a steady course towards is not optimistic. The Bank of England’s most recent forecast is that the UK economy cannot sustain GDP growth of over 1 per cent without a resurgence of inflation. Relative to the ten years before the pandemic, the UK’s growth potential has halved.
This puts Hunt in a conundrum: it is a time for bold, game-changing ideas that are also as mundane and predictable as possible. But today’s Budget was characterised more by the things Hunt didn’t do.
For example, the Chancellor did not stand up to the despatch box and announce that he was imposing a huge tax increase on the middle class. But by maintaining the current thresholds at which people start to pay tax, that’s exactly what he’s done. Keeping these thresholds frozen will push an extra 1.5 million people into higher tax bands by 2027-28, according to HMRC.
This is known as “fiscal drag” and while it is always the least fun kind of drag, it is especially serious during a period of high inflation because it means that even as the real wages of workers decline (regular pay is growing at 6.5 per cent, well below the consumer price inflation of 10.1 per cent), they will be subject to more tax (because those wages are nominally higher). The big winner is the Exchequer: according to today’s Office for Budget Responsibility forecast, Hunt’s threshold freeze will increase the tax take by £29.3bn per year by 2027-28, equivalent to a 4 percentage point rise on the basic rate of income tax.
At the same time, a boring Budget means Hunt wasn’t able to commit to a major overhaul of the tax systems that keep businesses from investing: business rates, which the Confederation of British Industry calls a “broken system”, and the VAT threshold, which causes thousands of small businesses to deliberately restrict their turnover below £85,000 a year, remain as they were.
So too do the rates charged on capital gains, meaning remuneration from wealth continues to be taxed, broadly speaking, at about half the rate of income from work. Although if you do earn a great deal of money, you could always register as non-resident in the UK and declare the income in another country (perhaps a tax haven?), thereby avoiding tax thanks to the UK’s “non-dom” rules – which, again, Hunt did nothing to reform, despite the estimated £3.2bn that could be raised every year from doing so. (Pipe down, cynics: the Prime Minister’s wife has been officially tax resident in this country for almost a whole year now.)
Hunt also didn’t change the Treasury’s established fiction of pretending, for the purposes of its forecasts, that fuel duty would rise, and then “freezing” the rise that everyone knew was never going to happen. In doing so he papered over a £6bn hole in the national balance sheet.
Elsewhere, the money committed to some areas of the state is so trifling that it was hardly worth handing out. A £63m fund for the UK’s public swimming pools works out to about £14,500 each and yes, I am willing to bet this is less than the Prime Minister spent installing his own swimming pool. An annual £1m prize for AI research would be transformative for a researcher, but it’s a droplet compared to the $1.8bn the US is investing in non-defence-related AI this year.
There were commendable items in today’s Budget: an end to energy companies overcharging their poorest customers through smart meters; a welcome (if also very debatable) upgrade to childcare; further devolution of funding for local government. But next to huge initiatives for green growth in the US and the EU, promises such as “up to £20bn” for early deployment of carbon capture technology seem designed to remain theoretical. Why not spend that money immediately on things that are proved to work, such as loft insulation?
As in business, the answer is that it’s often easier to have a meeting about what you might do in a few years’ time than it is to actually do the work now.
[See also: Spring Budget: Jeremy Hunt is too late]
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