Given the fiscal and political constraints he was operating under, Jeremy Hunt delivered a very good Budget today. The policy measures he announced were overwhelmingly welcome ones – and where I feel disappointment, it’s only because I wish he had gone further. As far as I can tell, there’s nothing nasty lurking in the fine print either.
That isn’t meant to sound like damning with faint praise. As my colleague Robert Colvile put it, it was ‘a very Hunt/Sunak budget. Tackling the problems in front of them, no drama… Calm competence. Policy over politics.’
And, for the most part, that’s exactly what Budgets should be like. It is actually quite refreshing – and may feed in to the growing political perception that, at last, we have a government focused on sensibly getting things done.
From a tax policy perspective, the big news was full expensing for investment in plant and machinery. As I’ve written before, this is a very good thing. The tax system has a structural bias against capital spending; full expensing restores neutrality, improves incentives, and should encourage investment, growth and higher wages.
Of course, as with any Budget, there are quibbles. It’s still a bad idea to raise the headline corporation tax rate by nearly a third, especially with the economy still relatively weak and Britain’s competitive standing clearly threatened. The new version of full expensing is slightly watered down (there’s only a 50% up-front deduction for ‘special rate’ assets), which means it may not fully offset the long-run negative impact of the higher headline rate.
The biggest problem is that full expensing, as announced, only lasts for three years. That is a shame because, as the OBR numbers show, temporary expensing will tend to bring investment forward rather than boost it sustainably over the long run. The growth effects are therefore fleeting, and go into reverse when the measure expires.
On the other hand, it is clear to me (and probably to everyone else paying attention) that the Chancellor intends full expensing to be a permanent measure, but needed it to be temporary for now so that he can meet his fiscal rules at the end of the five-year fiscal window. The question is, does this state of affairs give businesses the certainty they need to embark on big, long term investment programmes in the UK? Making full expensing officially permanent should be a priority for future fiscal events.
On the subject of fiscal rules, it is striking how different the (improved) OBR numbers are from the modelling produced by NIESR a few days ago, which forecast far more ‘headroom’ against the targets, and therefore more space for tax cuts or spending increases. A big part of the difference is that NIESR expects more inflation for longer, and expects that to effectively reduce the burden of government debt.
The issue here isn’t really who is right and who is wrong, but rather that there is a great deal of uncertainty embodied in a five-year fiscal window. Setting rules and sticking to them is clearly important for fiscal credibility, but there is also a problem with letting one forecast dictate policy choices (like making full expensing temporary) to such a degree. We haven’t yet got the balance quite right.
Back to the positives. The Chancellor’s pension reforms are excellent, both as measures to encourage older workers to stay in/return to the workforce, and as steps towards more neutral tax treatment of saving and investment (a nice parallel with full expensing). There are still issues to resolve with public sector pensions – frankly, it would be better to pay workers more up-front and give them the same kind of pensions as the rest of us – but the ‘lifetime allowance’ was simply a bad policy and few will mourn its abolition.
On the cost of living, extending energy price support was sensible, even if many of us still think the whole programme should have been better targeted in the first place. The decision not to raise fuel duty will likewise be welcomed by drivers, even if it does (again) underline the fact that fuel duty is an outdated tax with diminishing returns, and will eventually require a more modern replacement (e.g. some form of road pricing).
The Chancellor’s announcements on nuclear power were also very positive. If we want energy security and net zero without impoverishing ourselves and suffering rolling blackouts, we are going to need more nuclear. Probably a lot more. So it is good to see the government moving in this direction. We also need a lot of planning and regulatory reform to make sure that new nuclear can be delivered quickly and cost-effectively, but you can’t necessarily expect those issues to be fixed in a Budget statement.
That said, the Chancellor did find time to announce a potentially ground-breaking reforms to the regulation of medicines and medical devices. Going forward, if other big developed countries approve new drugs or technologies, we’re going to automatically do the same (mutual recognition). And we’re going to focus on making our own approvals process the quickest and simplest in the world. That’s great news for Britain’s life sciences sector – it is also precisely the approach we should be looking to replicate more widely as we reform our regulatory state after Brexit.
The final section of the Chancellor’s Budget speech focused on labour market inactivity – and what the Chancellor said was ‘the biggest positive supply side intervention [the OBR] have ever recognised in their forecast’. As well as the pension changes, the Chancellor announced major reform of disability benefits – echoing a call made by my colleague Karl Williams in an excellent piece of research earlier this week. The biggest news, though, was on childcare.
The phased extension of 30 hours of taxpayer-funded nursery care to working parents of children aged 9 months and up will undoubtedly be popular and help many women – and some men – back into the workforce. (The expansion of wraparound care in primary schools will, likewise, make life much easier for working parents.)
Boosting ‘free hours’ funding levels and ever-so-slightly relaxing carer:child ratios should help increase the supply of nursery places too – though questions do remain about whether supply will be able to keep up with increased demand. The Government needs to follow up with further regulatory reforms, both for nurseries and – crucially – for childminders. When it comes to the latter, cash incentives will be helpful, but probably won’t be enough to reverse the regulation-induced collapse of that market in recent years.
One big problem with the expansion of childcare, however, is that it creates an even bigger income tax cliff-edge at £100,000. Cross that barrier and you don’t just face a 62% marginal tax rate (the result of the personal allowance being withdrawn). If you’re a parent of a young child, you will also lose tax-free childcare (worth up to £2,000 a year), 30 hours a week of nursery for 1 and 2 year olds, and 15 hours of week of nursery for 3 and 4 year olds.
Even for relatively well-off parents, this could have a serious impact on their family finances. Yes, they may be able to avoid it by putting more in their pensions – but the work incentives here are rotten. There’s also a great deal of unfairness in cutting benefits altogether (instead of tapering them) and withdrawing eligibility based on an individual’s income, rather than the household total. That amplification of an existing problem should not sour our overall impression of the Budget – but it does mean there is more problem-solving to do in future.
It is always hard to see the wood for the trees, and make a balanced overall judgement of something as expansive as a UK Budget. These things are meant to include something for everyone, so inevitably there’s always something to gripe about too. Nonetheless, I’m happy to say that I was impressed overall by what the Chancellor and his team were able to put together. It wasn’t perfect, it didn’t go as far as I’d have liked, and I’d probably be a lot less happy if the corporation tax increase had been announced today instead of two years ago. But still, on a whole host of fronts, today amounted to a significant step in the right direction. And in politics, you have to take the wins where you can get them.
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