George Osborne will come to the despatch box on Budget Day keen to trumpet the best economic figures since the start of the financial crisis. He will announce that the economy is growing, inflation is down and unemployment is falling. All true, but Osborne’s tone cannot be triumphant. The size of the economy remains smaller than in 2007 and family incomes are no higher than 2001. Worse still, behind the good headlines on recovery, warning lights are flashing for the future.
A Fabian Society report published last week set out 20 tests for economic success and found that on half of them Britain is faring very poorly, despite the recovery. We conclude that focusing just on GDP, inflation and unemployment is simply not enough. The Fabians propose that a future chancellor should abandon GDP growth as his main criteria for economic success and instead ask to be judged on growth in typical family incomes.
First, the grim news for British business: productivity has not increased since 2007, business investment is far below levels seen in the early 2000s and the gap between imports and exports is the widest since comparable records began. All of this suggests that the recovery is a more of a “dead cat bounce” than a return to long-term sustainable growth. Another measure of sustainability provides equal cause for concern: our emissions of greenhouse gases are not falling fast enough to meet carbon budgets for the rest of the decade, in spite of the sluggish economy.
The signs aren’t any better for family finances. It looks like most of the rewards from economic recovery are going to the wealthy, since the gap between the top one per cent and middle incomes is rising. Earnings remain flat, the number of families who don’t have enough to pay for the basics is up, and so too is the number of in debt. On top of all this, housing is now no more affordable than at the peak of the last boom.
So the Chancellor should really be using this Budget to confront Britain’s huge structural failings head on. We need a radical plan for national economic recovery focused on business long-termism and a fairer distribution of rewards which will ensure that consumer demand remains buoyant for decades to come. This won’t happen for as long as Osborne believes that public investment is negative, not positive. Over the weekend he proudly trailed a derisory billion pounds of extra investment, but only to be paid for by raiding existing department budgets. By contrast, Ed Balls has opened the way to borrowing for long-term investment, with his announcement on Labour’s fiscal rules at January’s Fabian New Year conference.
When it comes to fiscal matters, there may be a lot of sound and fury on Wednesday, but expect little real change. Osborne’s strategy is now pretty much locked down: the Chancellor wants to achieve an overall budget surplus and, by extension, a long-term reduction in the size of the state. If this really is the Conservative’s long-term strategy, it begs big questions about how the right intends to pay for healthcare and pensions for our ageing population and invest in skills and infrastructure for the future. This should be fertile ground for Labour to remake the case for government, but as things stand the opposition is feeling its way with great caution, burnt by the coalition’s united attacks on Labour’s public spending record before the crisis.
All this means that a net tax giveaway in the Budget would be a surprise. It would only be consistent with Osborne’s long-term plans if accompanied by yet more cuts, or if it could be justified by a significant change in the OBR’s forecast for the economy’s potential for growth. What’s much more likely is a big headline tax cut, paid for by less obvious tax rises elsewhere. Another increase in the income tax threshold will be a good response to Labour’s campaign on the “cost of living crisis”. There are certainly many in Labour ranks who worry that in the run up to the general election, the promise of highly visible tax cuts will trump Ed Miliband’s more targeted efforts to address the living standards crisis through regulation.
For policy purists, an increase in the income tax threshold isn’t terribly sensible. Far better to reduce National Insurance for low paid workers. But it has acquired totemic significance for the coalition. Similarly, the argument over a 50p top rate of tax has acquired political weight far beyond the revenue raising or economic impacts of the policy. Labour knows it is on the right side of public opinion, but it is hardly the best way of designing taxation to ensure the rich pay more.
Privately, all the parties know that the tax system badly needs a much bigger overhaul. This needs to encompass the balance of tax between old and new economy; rich and poor; young and old; and between earnings, income, property and wealth. On top of all that we may well need more green taxes, despite the protests we can expect from the public and manufacturers.
But the annual spectacle of Budget showmanship is the wrong way to think through such major reforms. It is another example of the short-termist, confrontational politics that fails Britain. Whoever comes to power in 2015 should relegate the importance of the Budget and introduce institutional arrangements that force politicians to think ahead five years: Britain needs a long-term national strategy for sustainable growth and an independent review to design radical tax reforms.