The sorry tale of a pre-election budget

Jeremy Hunt’s latest budget is not massively anti-inflationary or expansionary. It’s a neutral budget, and as is often the case with a neutral budget, there isn’t much to comment on besides the fact it won’t do much to remove the UK from the economic turmoil it faces. It falls into the pitfall of classic UK economic management where any economic fine-tuning is momentarily undone during the election cycle: the belt is loosened, and a false dawn is provided to the electorate at the expense of real, actionable change. It’s a budget full of soft options that have been proposed with the Conservative Party’s poor popularity in mind. The 2p cut to National Insurance is a great example – worth £450 annually for workers on £35,000 salaries. The threshold beyond which the government starts withdrawing Child Benefit has also been raised from £50,000 to £60,000 to alleviate costs for many.

You cannot expect to manage the economy in such a reductive step-by-step manner as Hunt’s budget suggests, as he outlines a plan that considers policy starting from this year to 2028. The presumption that we can speculate economic conditions so far into the future is faulty. Such pledges will likely be tossed away as any other speculatory economic plans are ditched in the face of massive external international crises: such was the case during the 2008 Financial Crisis. Such low-probability events have the highest impacts but are hardly accounted for because of the lack of data to analyse and predict when they’ll happen. We are currently living in a recession that certainly could not have been predicted five years ago. Hunt, in a last-ditch effort, would like to optimistically believe the electorate will forget that and the many forward-thinking plans and budgets cut short by impending political issues that resulted in austere budgets and thus scrapped pledges. Budgets befit the short-term and hardly ever the future. Grand pledges will most likely hurt them given current economic conditions, where such promises are realistically hardly likely to be fulfillable within the framework of sensible economic management. They are also unlikely to align with what should be the main priority of the government: reducing inflation. Nominal interest rates ought to remain at their current level, following very minimal reduction in the rates of inflation observed. This is to curb that inflation and also allow for a far more competitive UK economy, assisting in augmenting productivity and output.

We frame economic policy and management through the lens of flawed reports that often mean forward-thinking policy is never followed through on

The variation in forecasts in economic conditions can only go so far. The OBR’s forecasts for government borrowing and inflation have often been faulty. We frame economic policy and management through the lens of flawed reports that often mean forward-thinking policy is never followed through on, with forecasts that are as unpredictable as this country’s weather pattern. The OBR, in its Autumn Statement projections, overestimated inflation and interest rates and has had to reassess its forecasts, again showing the futility of attempting to predict the future, even if it’s a future only half a year away. It is mere economic speculation at work that will never result in actionable policy. This is a last-ditch effort to appear as though they can remain economic masters and retain some semblance of confidence with the electorate that, in the long term, may take an economic toll. On the other hand, lowering taxes is positive for consumption and therefore aggregate demand. Its other shining light is that it may quell wage demands as lower National Insurance rates increase disposable incomes. It’s regrettably another soft option. These incremental changes are certainly not enough. But a party that seeks popularity and to restore the confidence of the electorate would hardly look for the bitter pill.

The extension of the windfall tax on profits of energy producers to 2029 ensures that a government in dire need of funds earns a considerable sum, making this an entirely necessary action. The non-dom tax status will also be scrapped, ensuring that those who move to the UK must pay tax on earnings from abroad. This will provide further funds to the country. It may, however, lead fewer people to make the UK their permanent home. This act correctly addresses serious inconsistencies in the tax system, but it’s possible there’ll be other tax loopholes that’ll be picked at.

The economy is seemingly heading in the right direction. With talk of lower interest rates in the near future, inflation falling to 3.4% in February, and expectations for some growth over the course of this year and the next, there is some reason to be optimistic. Most of these effects are obviously not a result of the budget alone; it’s the economy responding to events and rebounding. There was always going to be a slow rebound, but the UK has recovered much slower than other similar-sized economies. The right action has been taken to quell inflation, with austere budgets ensuring that a decline is possible.

Attempts to boost productivity, which has stagnated, require infrastructure development across the nation – funded through higher taxation

We have to be forward-thinking in creating a stable economy, one that can restore degraded public services. This will create grand political benefits and a brighter future. One must of course keep an eye on the balance of payments and public service spending – these can often be grossly mishandled, particularly when a new government looks to assert itself.

Jeremy Hunt has sensibly presided over stagnating public service spending to tackle inflation and the high balance of payments deficit. Attempts to boost productivity, which has stagnated, require infrastructure development across the nation – funded through higher taxation. Moreover, higher taxation in many senses also provides stability and lower inflation. Improving productivity will create higher standards of living, ensure firms are encouraged to invest in the UK and positively affect GDP.

Public services haven’t been set on a path of recovery, affected by previous poor economic choices that have resulted in the position we find ourselves in; 13% cuts to ‘unprotected’ departmental budgets in the next financial year are expected. Hunt has supported a rise in public spending in the year after, which means we won’t see any instant effect, but immediate increases in spending were unlikely to be feasible or fiscally responsible in an inflationary climate where curbing inflation has become the name of the game. We mustn’t overlook the necessity of increasing public spending to boost productivity and increase employment, but this shouldn’t be excessive, with the threat of overheating and inflationary wage demands if increases go too far. A balance must be struck. This has never happened before, with the pendulum swing of economic policy from austerity to high public spending and changes in approach by successive governments. The future is in the hands of our economic policymakers and the party that is voted in at the upcoming election.