Jeremy Hunt may be a safe pair of hands but Britain’s economic prospects remain bleak
The backdrop to last week’s Budget was particularly difficult for the Chancellor. It is harder for him to deliver a falling debt to GDP ratio than for any of his successors since 2010, when the Office for Budget Responsibility (OBR) was first set up.
Jeremy Hunt met this challenge – just – by tight spending plans and higher taxes. There are also some assumptions, such as returning to increases in fuel duties, that the markets are unlikely to believe. And he has had to say his welcome decision to allow full expensing against corporation tax is only temporary in order to get the desired impact on debt.
People should remember this Budget for the extension of free childcare to working families with children under three. This continues a long process of the state taking over more of the cost of childcare to free up parents to return to work: the government will be paying over 80 per cent of formal childcare for pre-school children in England. It also means that previously unmeasured, unpaid child care will now factor into GDP.
The decade 2017-2027 will go down in history as a lost decade with stagnating living standards
The combination of higher spending on childcare and defence with unchanged total spending plans means the squeeze on other spending will be greater than expected in November. And we have yet to see how any public sector pay increases are going to be funded.
The Budget was billed as an attempt to get people back to work. The measures are estimated by the OBR to result in an extra 110,000 people in work, at a cost of around £70,000 per job. The changes to the tax arrangements for pensions unravels some changes made earlier by the government. I fear this is one of the biggest problems businesses and individuals face: the ever changing tax structures for corporations and persons. This makes long term planning really hard. A proper tax strategy, ideally following the principles laid down in the Mirrlees report, published just before I left the Civil Service back in 2011, would be a massive step forward.
There are some sensible supply side reforms in the Budget that might help growth a little. However, the decade 2017-2027 will go down in history as a lost decade with stagnating living standards. This means the next election will be fought against a gloomy economic backdrop, in stark contrast to that pertaining in 1997.
Jeremy Hunt has done much to restore faith in the economic competence of the government, after the disastrous events of the autumn, and this Budget further reinforces his reputation as a safe pair of hands. But the short-term prospects remain bleak.
The Chancellor and his civil servants working in the Treasury will face growing pressures to spend more and tax less, particularly as the next election looms into view. The solution is a set of supply side reforms that have been prepared for ministers many times but somehow the political will to enact them is missing. I hope that the manifestos for the next election will include measures that would make a long-term difference to our productivity problem. That is a serious challenge for all political parties. I hope they confront it.
Lord O’Donnell, crossbench peer, economist and former head of the Civil Service
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