As we career towards a potential political crisis, it is becoming ever clearer that Philip Hammond’s budget is not good enough, writes Steve Macey
At a time of national crisis, amidst deep economic uncertainty, a grey chancellor with a public reputation for dullness stood up at the dispatch box. Sitting next to him was the prime minister, who faced sustained leadership questions amid their perceived inability to emotionally relate with voters.
This might sound like a description of Philip Hammond a few week back delivering his budget. However, it also effectively describes the mini-budget exactly ten years ago when Alastair Darling rose in parliament amidst the collapse of the banks, an emerging recession and widespread market panic. The two men can be easily compared; publicly perceived as bland technocrats suffering the misfortune to preside over economic uncertainty during an unpopular government.
However, their response to their respective challenges could not have been more different. I was a few months out of university and newly in the government economist service when Alastair Darling delivered his pre-budget report approximately 10 years ago, just months after the collapse of Lehman Brothers. As an economist in HMRC, I supported the analysis into the government’s major fiscal stimulus.
Brown and Darling grasped the wheel firmly, taking a strong and much criticised decision to temporarily cut VAT with immediate effect. They also embarked on temporary investment incentives, which reduced the payback time for business investment.
These were large, temporary and strategically targeted tax cuts, but they were not tax cuts undertaken by a desire to win votes. The VAT cut was widely mocked as having an ineffectual impact on prices, a failure to recognise that its principal impact was on business cash-flow. Temporarily increasing capital allowances was a geeky policy, not supported by the left due to its business focus or the right which wanted a corporate income tax rate cut.
Contrast this with Hammond’s budget. Brexit, the great source of uncertainty looming over our economy, was barely mentioned, and deficit reduction, the conservative raison d’etre since 2010, was abandoned. This will bring short-term respite – but not popularity – at the huge expense of failing to emit a sense of purpose which all governments need.
Beyond the lack of any sense of purpose, Hammond appeared intent on insulting us. It is never a good sign when you have to resort to the god-awful cliché ‘hard-working families’ before you’ve even reached the second paragraph. That Philip Hammond and his special advisors could not be bothered to use any more original or vivid language suggests they have basically given up.
Hammond conducted the budgetary equivalent of Corbyn’s much-mocked crowdsourcing of prime minister’s questions, seeking to placate different interest groups and funding needs seemingly at whim. Random dollops of money were spread about on various causes, including a strange one-off mid-budget allocation of £10,000 per primary school and £50,000 per secondary school.
Such a dire budget required a response by a dynamic progressive leader. Unfortunately, the only way Corbyn could be described as rising to the occasion is that his performance matched Hammond’s. To much bemusement, he delivered obviously pre-prepared lines about tax cuts for the rich. Hammond is many things, but he is not stupid enough to leave such a gaping open goal for Corbyn to hit. Corbyn was tiring to listen to, with no real strategic thinking other than that public expenditure needed to increase in seemingly every area.
Hammond treated businesses to a planned cut in the corporate income tax rate to 17 per cent, continuing the decrease from 28 per cent in 2010. However, our corporate income tax rate in the United Kingdom is already well below all our rivals, whilst our tax treatment of investment is less generous. Hammond’s cruel trick was to make this situation even worse by reducing depreciation for long-life assets, thus reducing the incentive for companies to invest in productivity-enhancing infrastructure and machinery.
A radical progressive alternative to this budget would be to use corporation tax policy to promote and support investment rather than profit. Cancelling the proposed additional cut in corporate income tax from 20 per cent to 17 per cent (or even increasing it to a rate still lower than the rest of the G7) could be combined with far more generous relief of investment expenditure. The impact would be mildly higher tax collection from low-investing companies (but still low by international standards) but lower taxes on companies which invest in productivity-enhancing infrastructure and equipment. This would support the much discussed and much needed rebalancing of the economy towards investment and industry, disproportionately helping areas outside London.
However, it was on personal income taxes where Hammond was most guilty of trickery. With the relish of a magician pulling a rabbit out of the hat, he whipped out his treat from his red box in the form of an increase in the personal allowances. The trick became apparent in budget small print the next day, when it was revealed that National Insurance Contributions would be increasing.
NIC’s are a tax on employment, something recognised by a conservative treasury team including none other than Mr Philip Hammond in the 2010 election campaign when they correctly labelled Labour’s proposed NIC increases as a ‘tax on jobs’. I can only imagine Hammond forgot such remarks.
He certainly appeared to forget the good example set by the last Labour chancellor who displayed strategic grasp and political courage so sorely lacking from his budget shambles.
Steve Macey is a former HMRC economist and Progress contributor
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