The budget we need
A deadbeat Government is likely to steal Labour policies for the Autumn Budget says
Following last year’s announcement that there will only be one fiscal event each year, the government is set to publish its Autumn Budget on 22 November. From 2018 there will be a Spring Statement, responding to the forecast from the Office for Budget Responsibility (OBR), but no major fiscal event. So the Chancellor will soon be dusting down his red box to announce plans for the economy.
What should the Chancellor be doing? With rising inflation, low productivity and faltering economic growth rate, two things need urgent attention. He needs to invest in the economy to increase its productive capacities and raise disposable income of the ordinary person.
With Brexit uncertainties, companies are holding back on their investment and the economy will not move forward significantly without direct investment from government. The Chancellor has created a bit of a wriggle room for himself by being a little less obsessed with the elimination of the public debt. Previous Chancellor George Osborne wanted to eliminate net borrowing by 2015, and failed miserably. In its 2017 manifesto, the Conservatives promised to eliminate the deficit by the middle of the next decade. That gives the government some room to manoeuvre.
Billions have been given to banks and the government could adopt the same zeal and invest in manufacturing, green and new technologies. The creaking infrastructure could be upgraded; pot-holed roads, slow railways, congested hospitals, unaffordable housing, crowded schools and people needing new skills to manage new technologies are all awaiting government response.
The reversal of recent corporation tax cuts could raise money for investment in the NHS, social care, childcare, housing and energy efficiency. However, all this militates against Conservative ideologies and will certainly require admission that the government’s tax cutting policies were wrong.
Government could fund all this by issuing People’s Bonds, which could give savers a decent return and at the same time make a real difference to the economy. This could also help people to save for their pensions and also cool the overheated stock market. Of course, government could borrow Labour’s idea of a National Investment Bank and build an investment fund of £500 billion, but that is unlikely to be on the table. Alas, we are more likely to see some isolated projects, such as transport projects for Northern England, rather than a much-needed rebuilding of the economy.
Money in People’s Pockets
Money in the pockets of the people is a key ingredient to building a sustainable economy. Companies will not invest if people can’t afford to buy their products and services. People have fuelled economic growth by personal borrowing and such a policy is now unsustainable. Household debt stands at £1.554 trillion and is expected to rise to £2.3 trillion by 2020, which would be much higher than the pre banking crash levels. This is a dangerous policy and may well be establishing the foundations of the next big crisis.
Raising people’s purchasing power should be a priority and the trends are worrying. Employee share of GDP is now 49.3% compared to 65.1% in 1976. For the last ten years, there has been no growth in wages. At the end of August 2017 the average pre-tax regular pay (excluding bonuses) for employees was £459 per week, compared to £473 per week in March 2008. Unsurprisingly, the average person now cannot entertain the possibility of owning his/her own home.
After ruthlessly implementing austerity and wage freezes, the government has little room to address the causes of the present low wage economy. Even if it were to commit to making the UK a high-tech economy, the outcomes probably won’t be evident until after the next general election. Trade unions have generally been in the vanguard of defending workers’ rights and securing higher pay and could be empowered, but the Chancellor will not be repealing any of the anti trade union laws.
There may be marginal reform of the ‘gig economy’ to give workers better rights, but that won’t significantly reduce inequalities or increase the spending power of the masses. The Chancellor might relax, not abolish as advocated by Labour, the pay cap for selected public sector workers but this will be miserly at best and certainly won’t help to make up the ground lost in recent years. He could increase social security benefits to help the low-paid, but that does not fit the current thrust of government policies.
People’s purchasing power can be improved by the introduction of rent controls and checks on speculation on the price of land, but government is unlikely to move in that direction. The Chancellor could check corporate profiteering by ‘capping’ the price of essential services, but other than a temporary freeze on the price of energy, there is little on the table. The International Monetary Fund (IMF) has said that higher taxes on the rich can reduce inequalities without hitting economic growth, but the Chancellor is unlikely to accept that advice even though this would provide a tidy sum for redistribution.
There will be the usual tweaking of personal allowances though the thresholds for the 40% and 45% income tax brackets may not rise in line with inflation. Stamp duty for expensive houses may be raised. The government would be looking for additional revenues and not much of that will come from tweaking taxes on tobacco and alcohol. The Spring Budget’s proposed increase in the National Insurance Contribution rates for the self-employed was rapidly abandoned after a public outcry and opposition from Labour. The Chancellor will be tempted to resurrect the proposals as part of reforms of the ‘gig economy’ proposed in Matthew Taylor’s report.
Steal Labour’s Policies
The Chancellor has to contend with the Corbyn effect which has made leftist policies an electoral asset. He will surely be tempted to steal and revarnish some of Labour’s policies. The government may woo younger voters by promising to cap, rather than completely abolish, university tuition fees. Following Labour’s electoral success, the government will surely abandon its manifesto pledge to abolish the triple lock on state pensions. It would be ironic that a party which sold vast swathes of council housing is likely to do a major U-turn and commit to a major council-house building programme.
The Chancellor again is likely to steal more Labour policies. Labour’s 2017 election manifesto promised to levy additional stamp duty on the purchase of UK residential property by companies located in offshore tax havens. In principle this could be extended to cover purchase by any foreign individual or entity. I suspect Tories would be keen on this policy as taxes would not be directly borne by UK citizens.
The government has been salami slicing tax relief on pension contributions for some years and that may well continue. Currently, the annual allowance is £40,000 and the Life Time Allowance is £1 million. The Treasury will be eyeing the tax relief on pension contributions, currently running at £50 billion a year. A 2016 report by the Pension Policy Institute estimated that by 2018, around 65% of the tax relief will be taken by additional and higher rate taxpayers i.e. those paying income tax at marginal rates of 40% and 45%; that is some 4.6 million workers out of a workforce of 30.4 million. The government may seek to cement its claims of being egalitarian by restricting tax relief on pension contributions to a flat rate of 20% i.e. equivalent to the basic rate of income tax. This change is likely to save around £13 billion and can provide a war chest for the Chancellor.
Overall, the government is hemmed-in by poor economic management, lack of vision and in-fighting and is unlikely to present a budget that the country needs.
Prem Sikka is Emeritus Professor of Accounting, University of Essex