More than a decade of austerity trapped Jeremy Hunt as he delivered his first budget, leaving him cornered. Allowing himself only puny resources to begin rebuilding Britain after years of underinvestment, he was left to boast about an extension of childcare funding that nursery providers quickly damned as too little to save many from going out of business.
The billions of pounds the chancellor needed to redress a multitude of financial shortfalls across the public sector were absent, even though the dire economic outlook he inherited from his predecessor, Kwasi Kwarteng, had eased somewhat. To mask his impotence, the chancellor mostly ignored the crumbling state apparatus to focus on eye-catching subsidies and tax breaks for business. In addition to the childcare funding, there was extra protection from energy price rises in April and millions of pounds to prevent another wave of swimming pool closures. This tinkering could not hide the fact that he failed to prevent the average household from suffering the largest fall in incomes adjusted for inflation since records began in the 1950s.
This seismic fall of 6% over two years to April 2024 can be measured another way, and that is to look to when inflation-adjusted incomes – the measure that considers the spending power of each pound in your pocket – will recover to the level seen in 2008. The Resolution Foundation thinktank says a combination of weak economic growth, high inflation and modest salary increases means the average pay packet is not expected to return to its 2008 level in real terms until 2026.
Such a record should, on its own, mean the end of this faction-ridden, mean-spirited government at the next election. It reveals how successive Tory chancellors from George Osborne onwards have deprived public services of resources – doing the opposite of fixing the roof while the sun shines – while failing to spur the business investment that generates high-paying jobs and the regular profits that support a flourishing economy.
The scar left by the hardest of Brexit deals needs to be mentioned. In its independent analysis and forecasts that accompany 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, the then chancellor, Rishi Sunak, said a turnaround was imminent. He offered businesses a tax break worth 130% of profits, known as the super-deductor, to boost 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 many years for most businesses to plan and implement major investments, and so, while there has been some take-up, it has proved a flop.
Hunt has sought to reinvent the super-deductor, limiting the benefit to 100% of profits in exchange for a wider range of things in which to invest. It was the largest giveaway in the budget, costing as much as £9bn a year in lost corporation tax. However, he has limited the scheme again, this time to three years and, as we saw in 2020, the limit is in place to meet a debt target.
There are two targets. One to bring down the annual spending deficit and another to bring down the amount the UK borrows as a proportion of its national income, though only in the fifth year of a five-year forecast. Treasury targets only relate to debt and make clear No 11 is primarily concerned with protecting the government’s finances. It’s why Hunt has curtailed the corporation tax subsidy rather than give businesses a long-term promise that brings certainty to their planning. It’s why the chancellor has deflected questions about the extra cost of pay rises for health workers above his self-imposed 3.5% cap and how the debt targets will be affected.
He could have a different set of targets. He could target a level of growth and wield his considerable financial muscle behind expanding the economy, as the National Institute of Economic and Social Research has urged him to. There was an opportunity to commit to green growth and explain how he would only support a renewal of crumbling infrastructure that took care of the environment. Investment in technologies such as solar and onshore wind were sidestepped in favour of diverting some funds towards the nascent carbon capture industry. It is only three years since the Cambridge economist Sir Partha Dasgupta was commissioned by the Treasury to explain how Britain has one of the most depleted natural environments of any industrial nation. But the 370-page report was pushed to one side in favour of investment zones, many likely to be located on green belt land and able to ride roughshod over existing planning rules.
Maybe it was inevitable this budget would focus on fiscal prudence, coming only months after Liz Truss and Kwarteng’s mini budget, which spooked international financial markets into questioning the UK’s status as a safe haven for foreign capital. The UK’s cost of borrowing has jumped in the past six months and now ranks as the second highest element of government spending after the health service. A lurking banking crisis, linked to the global rise in interest rates, should also make ministers more circumspect.
Nevertheless, Labour should break with a Tory obsession that sees no benefit in long-term public investment if it compromises an arbitrary debt target. No doubt, after Truss and Kwarteng, it will need to be judicious, but that still leaves plenty of scope for improvement.
