More than a decade of austerity trapped Jeremy Hunt as he delivered his first budget, leaving him cornered. Allowing himself only paltry resources to begin rebuilding Britain after years of underinvestment, he prided himself on an extension of childcare funding that daycare providers were quick to condemn as too little to save many from bankruptcy.
The billions of pounds the chancellor needed to repair a multitude of financial shortfalls in the public sector were missing, even though the dire economic outlook he inherited from his predecessor, Kwasi Kwarteng, had eased somewhat. To mask his impotence, the chancellor largely ignored the crumbling state apparatus to focus on flashy subsidies and tax breaks for businesses. In addition to childcare funding, there was additional protection against energy price hikes in April and millions of pounds to prevent another wave of swimming pool closures. This manipulation could not hide the fact that he failed to prevent the average household from suffering the biggest drop in inflation-adjusted income since records began in the 1950s.
This seismic 6% drop over two years to April 2024 can be measured in another way, and that is to look at when inflation-adjusted income, the measure that considers the purchasing power of each pound in your pocket, will recover to the level seen. in 2008. The Resolution Foundation think tank says a combination of weak economic growth, high inflation and modest wage increases means the average wage package is not expected to return to its 2008 level in real terms until 2026.
Such a record should, on its own, spell the end of this petty and factious government at the next election. It reveals how successive Conservative Chancellors, from George Osborne on, have starved public services of resources, doing the opposite of fixing the roof while the sun shines, failing to stimulate the business investment that generates good-paying jobs and the regular profits that support a flourishing. economy.
Mention must be made of the scar left by the harshest Brexit. In its independent analysis and forecasts accompanying the budget, the Office for Budget Responsibility said business investment was 20% lower than its estimates at the time of the referendum vote in 2016. Two years ago, then-foreign minister Rishi Sunak said that a sea change was imminent. He offered companies a tax break of 130% of profits, known as the super deductor, to spur the purchase of new IT equipment and machinery. To meet his debt targets over a five-year time horizon, he limited the subsidy to two years. It runs out next month. It takes most companies many years to plan and implement large investments, so while there has been some buy-in, it turned out to be a flop.
Hunt has sought to reinvent the super deductor, capping the profit at 100% of profits in exchange for a wider range of things to invest in. It was the biggest giveaway in the budget, costing up to £9bn a year in lost corporate tax. However, he has again capped the scheme, this time to three years, and as we saw in 2020, the cap is set to meet a debt target.
There are two objectives. One to reduce the annual spending deficit and one to reduce the amount the UK borrows as a proportion of its national income, albeit only in the fifth year of a five-year forecast. The Treasury targets only relate to debt and make it clear that No. 11 is primarily concerned with protecting government finances. That’s why Hunt has reduced the corporate tax subsidy instead of offering companies a long-term promise that brings certainty to their planning. That is why the chancellor has deflected questions about the additional cost of wage increases for health workers above his self-imposed 3.5% cap and how debt targets will be affected.
He might have a different set of goals. He could aim for a level of growth and exert his considerable financial muscle behind the expansion of the economy, as the National Institute for Economic and Social Research has urged him to do. There was an opportunity to commit to green growth and explain how you would only support an environmentally friendly renovation of dilapidated infrastructure. Investment in technologies like solar and onshore wind was shunned in favor of diverting some funds into the fledgling carbon capture industry. It’s been just three years since the Treasury commissioned Cambridge economist Sir Partha Dasgupta to explain how Britain has one of the most depleted natural environments of any industrial nation. But the 370-page report was swept aside in favor of investment zones, many of which are likely to be located on greenbelt land and may bypass existing planning rules.
It was perhaps inevitable that this budget would focus on fiscal prudence, just months after Liz Truss and Kwarteng’s mini-budget, which scared international financial markets into questioning the UK’s status as a safe haven for foreign capital. The UK’s cost of borrowing has risen in the last six months and now ranks as the second highest item of government spending after healthcare. A looming banking crisis, linked to the global rise in interest rates, should also make ministers more circumspect.
However, Labor should break with the Conservative obsession that sees no benefit in long-term public investment if it compromises an arbitrary debt target. Sure, after Truss and Kwarteng, he’s going to have to be judicious, but that still leaves a lot of room for improvement.