More than a decade of austerity has trapped Jeremy Hunt as he delivers his first budget, leaving him cornered. Allowing himself only paltry resources to start rebuilding Britain after years of underinvestment, he boasted an extension of funding for daycare centers that daycare providers were quick to condemn as too little to prevent many from going out of business.
The billions of pounds the chancellor needed to correct a series of financial shortcomings in the public sector were absent, although the dismal economic outlook he inherited from his predecessor, Kwasi Kwarteng, had dimmed somewhat. To mask his impotence, the chancellor has mostly ignored the crumbling state apparatus to focus on attractive subsidies and tax breaks for companies. In addition to the funding for the nurseries, there was extra protection against the energy price hike in April and millions of pounds to avoid another wave of swimming pool closures. This patch did not hide the fact that it failed to prevent the average family from suffering the biggest drop in inflation-adjusted income since records began in the 1950s.
That seismic two-year drop of 6% to April 2024 can be measured another way, namely when inflation-adjusted income – the measure that takes into account the purchasing power of every pound in your pocket – will recover to the level seen in 2008. The Resolution Foundation thinktank says that a combination of weak economic growth, high inflation and modest wage increases means that the average wage package is unlikely to return to the 2008 level in real terms until 2026.
Such a record should, in itself, spell the end of this petty, faction-dominated government in the next election. He reveals how successive Conservative chancellors, from George Osborne onwards, have starved public services of resources – doing the opposite of fixing the roof while the sun shines – while failing to stimulate the business investment that generates high-paying jobs and the regular profits that sustain a thriving economy. economy.
The scar left by the most difficult Brexit deals needs to be mentioned. In its analysis and independent forecasts accompanying the budget, the Office of Budget Responsibility said business investment was 20% lower than its estimates at the time of the referendum vote in 2016. Two years ago, then-Chancellor Rishi Sunak said that a turnaround was imminent. He offered companies a tax break worth 130% of profits, known as the super deductor, to encourage the purchase of new IT equipment and machinery. To meet his five-year debt targets, he capped the subsidy at two years. Ends next month. It takes most companies many years to plan and implement large investments, and while there has been some uptake, it has proven to be a failure.
Hunt sought to reinvent the super-deductor, capping the benefit at 100% of profits in exchange for a wider range of things to invest in. It was the biggest donation in the budget, costing up to £9 billion a year in lost corporate taxes. However, he capped the scheme again, this time to three years, and as we saw in 2020, the cap is in place to meet a debt target.
There are two targets. One to reduce the annual spending deficit and another 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’s targets refer only to debt and make it clear that #11 is primarily concerned with protecting the government’s finances. That’s why Hunt reduced the corporate tax subsidy instead of giving companies a long-term promise that brings certainty to their planning. That’s why the chancellor has deflected questions about the extra cost of pay increases for health workers above the self-imposed 3.5% cap and how debt targets will be affected.
He could have a different set of targets. He could aim for a level of growth and exert his considerable financial strength to expand the economy, as the National Institute for Economic and Social Research encouraged him to do. There was an opportunity to commit to green growth and explain how it would only support a renovation of dilapidated infrastructure that cared for the environment. Investment in technologies such as solar energy and onshore wind has been shunned in favor of diverting some funds to the nascent carbon capture industry. It’s only been three years since Cambridge economist Sir Partha Dasgupta was commissioned by the Treasury to explain how Britain has one of the most degraded natural environments of any industrial nation. But the 370-page report was sidelined in favor of investment zones, many likely located on green land and able to bypass existing planning rules.
Perhaps it was inevitable that this budget would focus on fiscal prudence, coming just a few months after the Liz Truss and Kwarteng mini-budget, which caused international financial markets to question the UK’s status as a safe haven for foreign capital. The UK’s cost of borrowing has risen over the last six months and now ranks as the second highest element of government spending after healthcare. A looming banking crisis, linked to rising global interest rates, is also likely to make ministers more cautious.
However, Labor must break with the Conservative obsession that sees no benefit to long-term public investment from committing to an arbitrary debt target. Undoubtedly, after Truss and Kwarteng, it will be necessary to be judicious, but that still leaves a lot of room for improvement.