There’s just eight days to go until the Chancellor of the Exchequer George Osborne delivers his penultimate budget before next year’s general election. In recent years, the budgets have been delivered under the depressing background of economic stagnation. Over the past three quarters, however, the UK’s economic fortunes have improved markedly. The Office for National Statistics believes real GDP growth is currently running at an annualised rate of 2.8 per cent, and many believe there will be significant upward revisions to the budget’s growth forecasts.
Despite this improved outlook, the UK’s broad fiscal and economic challenges remain much the same. December’s Autumn Statement forecast the UK would borrow £111.2 billion this financial year - £51 billion higher than was forecast back in 2010. The national debt is expected to reach £1.6 trillion by 2018/19, meaning very high annual debt interest payments. The structural deficit – the part that will not dissipate as growth raises tax revenues - is still very high at over 5 per cent of GDP. The Financial Times has calculated that despite the improved economic outlook, the so-called spare capacity of the economy now looks lower than previously estimated. If this is correct, a further £20 billion of fiscal consolidation will be necessary. As if all this wasn’t difficult enough, there are long-term challenges for the public finances as our population ages (as the IFS’s Paul Johnson explained to ieaTV).
The public finances have been worse than expected since 2010 because growth has been much lower than expected. Large structural factors, such as new regulation in the financial and energy sectors, high debts across all economic sectors and high levels of government spending have undermined the structural growth rate of the economy. Productivity growth has been low. And as such there has been a substantial squeeze on living standards.
As the Chancellor develops his budget then, he’ll be considering numerous questions: how can the fiscal repair job be completed? What can policy do to improve the potential growth rate of the economy? And what government policies can be adopted to ease the cost of living?
Numerous IEA papers have contributed to each of these debates. Sharper Axes, Lower Taxes highlighted how the government might adopt a genuine comprehensive review of public spending – not just salami slicing what government does, but reviewing the whole scope of the state and facilitating a substantial pro-growth reduction of the tax burden whilst closing the deficit through reduced spending. Will flat-lining become normal? reviewed the structural factors holding back a strong recovery. And Redefining the Poverty Debate explained how a deregulatory agenda in housing, energy, childcare and food markets could genuinely help ease the squeeze on living standards, in contrast to the raft of hare-brained interventions, and price and wage controls advocated in contemporary debate.
Today Philip Booth, Mark Littlewood and I release our submission to this year’s budget. Our hope of course is that the Chancellor will use the 19th March to outline a pro-market agenda of smaller government and a raft of deregulatory measures, for the reasons outlined above. But we recognise that the Chancellor is unlikely to significantly change course to the more radical agenda we believe is necessary a year before the election.
What more pragmatic things could he do in this budget then?
- In terms of deficit reduction, pensioner benefits should be urgently reviewed. Winter fuel allowances, free bus passes and free TV licences have little economic rationale, and thus far pensioners have been largely insulated from the broader fiscal consolidation. Not only should these be abolished, but means-tested pensioner benefits should be increased by 1 per cent per year for the next few years, in line with government policy for means-tested working-age benefits.
- To make governments more honest about how they tax us, legislation should be introduced requiring the thresholds for inheritance tax, stamp duty, and all income tax thresholds to all be increased by the higher of wage inflation or retail price inflation.
- On the hugely pertinent question of taxation of property, the government should urgently reform the slab structure of stamp duty. Whilst there is no case for a wealth tax or so called mansion tax, the government might consider replacing council tax with a tax on imputed rent for high-valued properties, and using any additional revenues to reduce the burden of stamp duty.
- In terms of deregulation, the government should pass a law allowing new firms and small businesses to be able to treat a certain number of new employees as self-employed contractors, to exempt them from a raft of employment legislation. They should also introduce mandatory sunrise clauses for new regulations.
- Finally, the government should consider reforming the process of budgets and Autumn Statements entirely, to take them back to their purpose of announcing overall tax and spending totals. At the moment, they create a big bang of uncertainty for the economy, lead to bad tax legislation via finance acts, and the process itself leads to a host of lobbying opportunities which incentivises headline-making schemes rather than well-scrutinised policies.
Ryan Bourne is the co-author, with Philip Booth and Mark Littlewood, of the IEA Submission to the Budget.