Up until the last few minutes of his third budget it was hard to distinguish Rishi Sunak from Gordon Brown in his pomp. The hour-long address was peppered with spending pledges on everything from schools to prisons, from theatre refurbishment to community football pitches.
Then, as the peroration approached, the real Sunak emerged as he launched into a statement of his belief in a Britain where taxes are lower and the state is smaller. The chancellor could hardly have been clearer: he intends to get taxes down before the next general election.
This channelling of Sunak’s inner Nigel Lawson was given substance by one of the few measures not trailed in advance: the decision to reduce the taper rate for the withdrawal of universal credit from 63% to 55%, which will allow low-paid workers to keep more of what they earn before their benefits are cut.
While it only gave back a third of the money raised, this was a tacit admission that the decision to scrap the £20 a week increase in UC announced at the start of the pandemic was a mistake. It was also intended to show the government’s planned direction of travel.
Sunak felt the need to provide his colleagues with some reassurance that the spirit of Margaret Thatcher was alive and well in the Conservative party because – as the Office for Budget Responsibility noted – his two budgets this year have raised taxes by more than any chancellor since the two Norman Lamont and Ken Clarke budgets in 1993.
To be sure, there were tax cuts in the budget – the crowd-pleasing cuts in alcohol duties, the customary freezing of fuel duties for motorists, and a business rate discount for the hospitality, retail and leisure sectors among them.
But these followed two whopping increases in taxes already announced: the post-dated increase in corporation tax in March and the rise in national insurance contributions (NICs) announced in September.
The OBR says the result is that taxes as a share of national output are the highest since the end of Clement Attlee’s premiership in the early 1950s while spending is back to levels last seen in the late 1970s.
Sunak is able to offer more spending now while promising tax cuts later because the economy is doing better than the OBR envisaged in the spring. Growth is higher and – crucially as far as the public finances are concerned – the OBR’s estimate of the amount of long-term damage to the economy caused by the pandemic has been reduced from 3% to 2% of gross domestic product.
Add in the money raised from NICs and the chancellor had about £50bn of resources to deploy in this budget. Of this, the chancellor spent about £30bn – giving more money to the NHS and Whitehall departments – and banked the rest. The OBR estimates that he can meet his fiscal rules – to have debt falling as a share of national income and to avoid borrowing for day to day government spending – with up to £25bn to spare.
The Treasury says a prudent approach is needed, because every one percentage point on inflation and interest rates adds $25bn a year to the cost of servicing the government’s £2tn-plus debt. It also says the lesson from history is that most recessions cause scarring of more than 2% of GDP.
What could go wrong? Well, apart from a new wave of the pandemic, the risk is that the economy slows and inflation picks up. Sunak was bullish about the economy’s prospects but the OBR said growth was slowing and inflation would hit 4.4% next year. Even a mild dose of stagflation would blow the chancellor off his tax-cutting course.
