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29 October 2018updated 26 Jul 2021 11:46am

The Chancellor should have focused on sustainable tax rises, not spending magic money

Instead, tax cuts will exacerbate inequality while foregoing the revenue required for a more active and entrepreneurial state.

By Tom Kibasi

Nothing in today’s budget could conceal the fact that Britain’s economy remains in the doldrums. After a decade of sluggish economic growth, the economy is set to grow at just 1.4 to 1.6 per cent into the 2020s. The Chancellor confirmed that he has no ideas for how to get the UK’s economy out of the low-productivity, low-wage equilibrium it has settled into. Under current plans, the UK economy will not achieve escape velocity from an economic model that isn’t working to one that does.

Instead, the Chancellor focused on spending imaginary money: better than forecast tax receipts have allowed the OBR to revise its assessments for the public finances, meaning that the Chancellor largely steered clear of tax rises. The main focus was the re-statement of the funding settlement for the NHS, though notably the Chancellor failed to address the exclusion of education and training, capital investment, and public health budgets. As IPPR research published last week shows, the increase in funding for mental health is just half what is required to achieve so-called ‘parity of esteem’

The Chancellor claimed to have “ended austerity” because departmental spending would rise by 1.3 per cent from next year’s spending review. Yet this goes nowhere near to reversing the enormous cuts to budgets since 2010. In fact, it confirms that the government intends to sustain austerity into the 2020s – part of the explanation as to why the growth figures are so dreadful. Similarly, a mere £650m for social care will do little to meet the pressures of an ageing population and falling local authority budgets.

It is evident that Britain taxes too little, not too much. Given creaking public services, the changes in demographics, and the need to raise public investment in areas such as R&D, the Chancellor should have focused on sustainable tax rises rather than tax cuts. Yet instead, the changes to the threshold for the higher rate and increases in the personal allowance will exacerbate inequality while foregoing the revenue required for a more active and entrepreneurial state.

One welcome step forward was on the digital services tax. This appears to have been inspired by the IPPR Commission on Economic Justice proposal for an “alternative minimum corporation tax” — shifting from profits to revenues as a basis for taxing multinationals. Yet the real question is why the Chancellor has chosen to focus on so few firms, rather than the very large number of multinationals that are avoiding their responsibilities. The result is a tax change that has the potential to raise billions bringing just £400m to the exchequer.

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A modest package of measures to boost investment fall well short of what is required to address Britain’s investment crisis which stretches back decades, as the IPPR Commission on Economic Justice pointed out. The increase in investment allowances was one small measure proposed by the Commission and adopted by the Chancellor. But the bold moves to create a new National Investment Bank and to substantially increase investment to the G7 average were missing. Investment is the engine of economic growth, and it remains in long-term decline.  

As the final budget pre-Brexit, it is astonishing that the Chancellor failed to bring forward the deep reforms the British economy so desperately needs. Perhaps if he had spent a little less time on crafting groan-inducing jokes and a little more time on policy, he might have had more to offer. But then again, strengthening the economy was not the core purpose of this budget: rather, it was aimed at shoring up support on the government benches for the “meaningful vote” on the Brexit deal. And it is the application of that yardstick which probably explains why the Chancellor was quite so pleased with himself. 

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