29 October 2018

Hammond needs to mix prudence and imagination in today’s budget


In some ways the most sensible thing Philip Hammond could do upon taking the despatch box at today’s budget is sit straight back down. Whatever now happens with Brexit he must know it will require an “emergency budget” in the spring. And with the OBR providing a £13 billion boost in the form of stronger tax receipts last week, he can forestall the great NHS treasure hunt too.

So with an outlook this uncertain and the summer spending promises deliverable, this most cautious of Chancellors could be forgiven such a moment of high parliamentary theatre. After all, you do not need to be as Eyeore-ish as “spreadsheet Phil” to conclude that this is no time for fiscal showboating.

Alas, any hopes for a tepid non-event were quashed by the Prime Minister’s temperature-raising promise of an “end to austerity”. Not only that, she has set Hammond this task whilst maintaining the pledge that public sector debt will be falling as a share of GDP by 2020. It is of course possible that the Prime Minister is now a full bore Keynesian who believes these goals to be compatible. But if so it does rather beg the question what on earth she thinks her colleagues have been up to these past eight years.

This, as CapX editor Oliver Wiseman has highlighted, underlines the political peril of unravelling austerity for the Tories. On one hand, a lack of ardour for anti-austerity economics can be pitched as a pragmatic foil to Labour’s more ideological yearning. On the other, if the last eight years of pain are undermined to the point of being perceived as unnecessary then the public’s electoral vengeance will be swift.

The sensible thing would be to demur until after March’s withdrawal agreement when the economy may direly need some expansionary animal spirits anyway. But with the tyranny of the diary upon him, Hammond also needs an answer to the Prime Minister’s conundrum that can take the wind out of Labour’s sails in the here and now.

His response should be an audacious gambit on welfare. Ending the benefits freeze — which keeps most welfare entitlements flat-lining rather than rising in line with inflation — and reversing the “work allowance” cuts currently contained in Universal Credit would cost around £6 billion. This could be paid for by cancelling planned cuts to corporation tax that unnecessarily take us down to 17 per cent from an already competitive 19.

Crucially, a package like this would avoid the choreography of bringing forward personal allowance tax cuts — which benefit higher rate taxpayers most of all — while doing nothing for the very poorest. But it would also open up a unique area of attack for the Tories. For despite all those hypothetical billions on tuition fees and nationalised utilities, Labour’s 2017 manifesto neglected welfare. The prize on offer for Hammond is to say the Tories are beginning the “end of austerity” with the poorest. But more startlingly still, that with this package Tory welfare policy would be more generous than Labour’s.

Then, with Labour’s fox shot, the Chancellor should show some imagination on tax. For the reality of the Prime Minister’s twin promises — not to mention the cost of us all living longer (which will make austerity look like a fiscal picnic) — is that long-term they can only be met by tax rises. Yet at every stage of this budget build-up the Chancellor has found eminently sensible revenue-raising proposals — reducing higher rate relief on pensions, for example — lambasted by his parliamentary colleagues.

This will not do — sooner or later the Treasury will have to get creative. Therefore, whilst showing short-term prudence, the Chancellor should pepper today’s speech with a raft of radical commissions.

For example, what about a commission on a land value tax — so beloved of economists — to replace business rates? Why not explore how local property taxation can finally kill off the insanely regressive council tax? Seeing as we are leaving the EU, why not look at whether advances in personalised shopping technology can bring an element of progressive price-banding to VAT with poorer consumers paying less? Is corporation tax really the best way of taxing multinationals or might a local sales tax work better?

And given the Chancellor’s keen interest in self-employment taxes, what about an engagers tax so that the hirers of self-employed labour make up the short-fall with employees rather than flat-out freelancers? That would boost arbitrage efforts in the gig economy, which could be further supported by exploring “shared social security” — a contributory benefits scheme proposed by American labour activists, that ensures entitlements accrue for every hour worked.

None of these radical questions need answering now. But the Chancellor can make sure somebody answers them in the future. After all, a political question asked, he may reflect rather ruefully today, is one that cannot easily be ignored.

Alan Lockey is Head of Research at Demos.