A Budget for the next generation? Not likely.

'This is a Budget for the next generation', the Chancellor repeatedly claimed as he announced his eighth set of spending and taxation measures. As it turned out, it wasn't even a budget for the next week. As planned cuts to disability benefits have been hastily reversed, media attention has turned to the resulting hole in the budget arithmetic. Yet the U-turn performed by the Chancellor should not deflect attention from other, more serious concerns with the Budget. These concerns, in turn, relate to deeper flaws in the present economic policy of the government – flaws that must be rectified if the UK economy is to recover in a sustainable fashion.

Just as in the last Parliament, George Osborne has again shown greater flexibility than his austerity rhetoric suggests. In the face of cuts in the forecasts for growth, productivity and inflation, Osborne used the Budget to relax fiscal policy a little. In particular, Osborne announced several giveaways – notably on income tax thresholds, capital gains tax and continued fuel duty freezes – which tend to favour the better off and which together amount to a revenue cut of around £3bn in 2017/8. In economic terms, looser fiscal policy against a slowing economy makes sense. In political terms, however, the budgeted cuts to the disability payments coupled with the giveaways favouring higher earners were always asking for trouble. 

More trouble is in store for the Chancellor because of his aim to achieve an overall budget surplus in 2019/20. This element of the Chancellor’s fiscal mandate was always arbitrary; however, as the Office for Budget Responsibility highlights, its achievement in the future will require even more austerity than previously thought. In the short term the slowdown in growth and tax receipts together with the Budget’s giveaways lead to an initial increase in public borrowing of some £35bn between now and 2018/9 when compared to plans set-out as recently as November’s Autumn Statement. But then in order to meet the budget surplus target, one of the largest post-war reductions in government borrowing is required: borrowing of £21.4bn in 2018/9 is planned to swing into a surplus of £10.4bn in just one year. This is not likely to happen.

Indeed, one part – the planned £1.3bn cut in personal independence payments to the disabled by 2019/20 – we already know will not now happen (although in budgetary terms this is not a very large amount). Of the rest, a large chunk of the savings come from further squeezes on government departments: a £2bn a year increase in public sector pension contributions paid out of existing departmental budgets from 2019/20 and unspecified further cuts to departmental spending of £3.5bn in 2019/20 (all will be revealed by an ‘efficiency review’ that will not report until 2018). These cuts are on top of previous retrenchments – their effect will be to further worsen the provision of public services.

A further major contributing factor to the planned turnaround in the deficit comes from changes to the pattern of capital spending. This is now set on a roller-coaster trajectory, with net public investment set to rise in 2016/17 and 2017/8 before falling sharply to 2019/20 and rebounding rapidly the year after. Moving money around makes sense if the aim is to save the Chancellor’s blushes in missing yet another fiscal target but it makes no economic sense. Notwithstanding these gyrations, public investment itself remains too low. Even with the welcome rise at the end of the Budget forecast period, net public investment remains under 2% of GDP on average over the next five year, equaling the record under the Thatcher administrations and behind the average of 2.2% of GDP under the Coalition.

The reluctance of the government to invest is puzzling in the context of a consistently weak productivity performance. An important element of the government’s productivity plan is to raise the country’s capital stock and capacity. However, it is not clear that corporation tax cuts and incentives are raising private investment significantly – rather the evidence is that firms are sitting on large amounts of cash instead of investing, despite a more favourable tax environment. And, despite some eye-catching Budget announcements on Crossrail 2 and a new trans-pennine rail link (‘High Speed 3’), the present Budget merely allocates money to feasibility studies. The funding of any future projects remains in question – this is in spite of low interest rates which make borrowing for investment an economic no-brainer. Overall, the rhetoric runs far ahead of the reality.

Notwithstanding the Chancellor’s pragmatism in allowing borrowing to drift up as the economy slows down, he is in effect chasing his tail. Continuing the overall squeeze on public spending when the Bank of England has run out of ammunition to boost the economy is destined to prolong low growth and weak productivity and with it lower living standards. Compounding that is a refusal to consider the role of public investment in any serious way. Only a new fiscal framework which focuses seriously and consistently on the role of public investment and infrastructure improvement will break the economy out of this slough. The next generation will not thank the Chancellor for this Budget. Indeed, they are likely to decry it, for its lack of ambition and sheer folly.