Predicting the precise detail in next month’s Budget from the new and untested UK Chancellor is a fool’s undertaking, but if there is one certainty in these capricious days, then it’s this: tax and spend is no longer absolute anathema among the Conservatives.
That is not to say there will not be plenty of window dressing to emphasise the government’s credentials as guardians of fiscal responsibility. Nor is it meant to imply that some loosening of the borrowing rules is a bad thing.
Now just a fortnight into his post as Chancellor of the Exchequer, Rishi Sunak inherited a brief where public spending had already been identified as the stopgap to weak private-sector growth. His predecessor, Sajid Javid, started ripping up the government’s borrowing rules back in November with promises of additional cash to support an “infrastructure revolution”.
“I don’t think we’ll see anything that was not already in the previous Chancellor’s Budget,” said Jeremy Peat, acting chair of The Royal Society of Edinburgh Economy and Enterprise Committee. “There just has not been time for any changes of any significance.”
On the populist front, it has been reported that Mr Sunak will use the March 11 Budget as a platform to announce that some of the 1,500-strong Treasury team will re-locate to the north of England, where the Conservatives staged a political coup in breaking down the “red wall” of Labour support during December’s election.
The exact location of this “economic decision-making campus” is unclear, but its aim is to show northern voters who switched to the Tories that the UK government is serious about their priorities.
The Budget is also set to approve £100 billion of additional infrastructure spending on projects such as HS2 and superfast broadband, with much of this once again targeted at northern England.
As such, this will mark the first government spending boost to the economy since the financial crisis. Mr Sunak’s job is to figure out how to pay for it.
That’s where the borrowing rules come in. Since George Osborne’s emergency budget in June 2010, the government has been focused on cutting spending to reduce its debts and achieve a fiscal surplus, a strategy that University of Strathclyde research associate David Eiser described as “taking it to an extreme that was perhaps too far”.
“Some recalibration does not suggest that the government is being less responsible than it was in the past,” he said. “There is no reason not to borrow for long-term investment, as this comes with benefits that will be there for many years to come.”
But Mr Eiser and others reckon there is only limited wriggle room when it comes to watering down the existing borrowing rules. Tax increases will almost certainly have to make up part of the package – the only question is, where might these land?
The odds appear to have lengthened somewhat on one that was last week touted as a likely target: tax relief on pension contributions made by higher earners. This plan was also hatched under the previous tenure of Mr Javid, whose departure has not derailed the Tories’ “levelling up” agenda that will remain the theme on March 11.
The move would restrict the tax relief on pension contributions to
20%, rather than climbing to the 40% enjoyed by higher earners. But there is potentially toxic political fallout from this, as it would add to business costs while also alienating traditional Tory voters.
It’s also, as Mr Eiser points out, “a very significant change to announce in a Budget”. Pension tax relief is a firmly embedded system that would likely require more formal consultation and review before any radical changes are made.
RBS economist Nick Stamenkovic said other aspects of the pensions system could still be up for grabs, such as a cap on tax-free lump sums. Meanwhile, traditional targets like fuel duty are even more appealing amid the current push for green reforms.
How much chipping away Mr Sunak will need to achieve will depend to a large extent on what the Office for Budget Responsibility (OBR) has to say about the state of the public finances in its latest review, which is due out the same day as the Budget.
The Government gets the benefit of an early look-in, and will be adjusting its plans accordingly.
This could give Mr Sunak a slight boost if borrowing is lower than previously forecast, but there will also likely be downgrades on economic growth for the coming year. Whatever the minutiae, all signs are pointing to one of the most expansionary Conservative Budgets in a generation.
“There will be tax rises because even if they make some changes to the fiscal rules, additional funding will still be required,” Mr Stamenkovic said. “The question is which taxes, and by how much?”
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