The challenge for the Chancellor in this Budget was that he was trying to do two things at once which – in the current circumstances – are incompatible. He wants to be prudent and responsible, and he wants to cut taxes. The reality is that he cannot do both.
Jeremy Hunt can only meet his fiscal rules and cut taxes in the way that he has promised by raising other taxes – that he has previously thought unwise – and promising spending cuts that almost no one believes are deliverable.
To give one illustration of the nature of Hunt’s spending plans, the Institute for Government calculated after the Autumn Statement that we will need to cut prison spending by 6.7 per cent a year for three years, taking into account projections of a higher prison population. That will inevitably require a reduction in the number of prison officers (from 22,500 to 18,500).
We know that this specific cut is unsustainable because we have been here before. A sharp reduction in prison officers after 2010 contributed to a loss of control in our prisons. Rehabilitation services were reduced, and the risk of prison riots increased. In 2016 (when Liz Truss was justice secretary and I was chief secretary to the Treasury), we announced the recruitment of an additional 4,000 prison officers. Unsustainable cuts in spending are either never implemented or are swiftly reversed.
That is why the spending plans confirmed by Hunt today are a work of fiction. It could, to be fair, have been worse. The Treasury had briefed that spending on public services could be cut from 1 per cent a year in real terms to just 0.75 per cent but that proved to be an exercise in expectation management. Even so, Hunt’s plans are still undeliverable, and we will be spending more on public services in the next parliament than they imply, even if neither the Conservatives nor Labour admit it. Given that this is the case, the £10bn tax cuts announced by Hunt are not affordable.
Whether there will be much gratitude from his parliamentary colleagues and the electorate remains to be seen. For a long time, Tory MPs have demanded tax cuts, believing that they would be transformative for the Conservatives’ electoral standing. Hunt obliged in last year’s Autumn Statement by cutting National Insurance contributions by 2p but the Tories failed to recover, and he has been criticised for cutting the wrong taxes and by not nearly enough. Presumably, as he delivered another 2p cut today, we will start to hear the same complaints again very shortly.
In the eyes of the Tory right, the Chancellor is not the only one to blame. The Office for Budget Responsibility (OBR) has been denounced for not adopting a more optimistic appraisal of the dynamic benefits of tax cuts. But Liz Truss’s mini-Budget in 2022 should be a reminder that the markets – like the OBR – don’t have faith in the belief that tax cuts are self-funding.
A further criticism of the government’s fiscal policy – and not one confined to the tax-cutting right – is that it is too driven by arbitrary fiscal rules. Without them, it is argued, we could – depending upon your point of view – increase productive public spending and/or cut harmful taxes. It is certainly true that the current debt rule (which requires debt as a proportion of GDP to fall in the fifth year of the forecast period) is an odd one which is being very heavily gamed. But this does not discredit the principle of fiscal rules, rather it makes the case for improving them. Previous debt rules – such as debt falling in a fixed year – have made more sense but have also been more restrictive than the current one.
Not being able to borrow more is frustrating, especially if you believe, say, that infrastructure spending or tax cuts can have a transformative impact on economic productivity. But at a time when debt flatlines in years without economic shocks, when demography is increasingly working against us, when the pressures on defence spending are likely to grow, and when we are not yet properly paying for the cost of decarbonisation, allowing borrowing to increase without making very hard choices on priorities is not sustainable. If a particular policy is beneficial, governments will have to make room for it by raising revenue or reducing expenditure elsewhere.
The problem – for the country and not just the government – is not that Hunt is insufficiently bold or that he has chosen the wrong taxes to cut (if he was going to cut one of the big taxes, NI was a much better option than the alternatives). Nor is it the caution of the OBR or the existence of fiscal rules that constrain borrowing. The reality is that we cannot afford easy choices, and yet that is all that our politicians dare offer. Unfashionable though it may be to say, we do need the sound money policies of which the Chancellor spoke. Unfortunately, that is not really what we got from the Budget.
[See also: The Conservatives still look doomed]
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