A week after the Budget, it is clear to the discerning eye that it was built on some fundamental misconceptions which raise questions not just about the public finances, but Boris Johnson’s vision for the country. However, peculiarly, the Budget has not fallen apart and the Chancellor, Rishi Sunak, is sticking to his plan, for now.
The founding misconception is to treat coronavirus spending like any other period of largesse which must be reined in. Whereas, in fact, it is a one-off cost which should be ring-fenced and accounted for over 50 or 100 years.
Indeed, it is for just such contingencies that the modern nation state and financial markets were invented in Britain in the first place in the late seventeenth century, when the Glorious Revolution restrained the power of the executive and put spending on an orderly footing and, simultaneously, the Bank of England and London Stock Exchange were founded to provide long-term public and private financing.
Unlike the rest of us, nation states do not take out insurance policies for catastrophes. They effectively insure themselves by borrowing to meet the sudden cost of wars and floods and the like. Despite some colossal wastefulness, like the £37 billion Test and Trace project, the virus will soon be seen as costing no more than, say, the Korean War in the 1950s, about which we do not worry.
If you think like this then, for instance, paying nurses and doctors a one-off bonus for their efforts in the crisis is not only the honourable and politically prudent thing to do, it makes economic sense as well. It is bizarre that ministers cannot see this. All the coronavirus costs can be met by issuing long-term government bonds or gilts and paid off incrementally over many years.
The second misconception is to believe that the underlying public finances are in such a poor state that another period of austerity is required from 2023 to put them right, through pay freezes, freezes in tax free allowances and dramatic rises in corporation tax.
On the contrary, thanks to the efforts of George Osborne, the public finances have been in broad balance in recent years. The real problem with the British economy is low investment, especially business investment. Our recent track record is the worst in the G7. Business investment flatlined in the last four years and then went off a cliff in 2020. The Bank of England estimates that our long term trend rate of growth has fallen from 2.5 per cent to 1.5 per cent in the last decade.
Business investment is not only a critical leg of economic growth, it underpins the key driver of growth: productivity. Great nations, during times of change, stimulate investment. That is what we did in the Industrial Revolution, what America did in the 1870s and what Germany and Japan did after the war.
It therefore follows that Rishi Sunak’s massive increase in corporation tax, from 19 per cent to 25 per cent in 2023, which will reduce the returns to investors in the UK and will reduce companies’ ability to retain profits, is a terrible miscalculation. It will have the opposite effect of intended, and in the end produce less revenue, from income tax and VAT and other taxes, not more. It will make the public finances less sustainable, not stronger.
It is no use saying that it will still be competitive compared to the United States. America has huge inbuilt advantages and a strong track record of innovation. We, by contrast, have a huge amount of catching up to do.
The Treasury justifies its caution by saying it is worried about inflation and interest rates. Again, this a misconception. We live in an era of abundance, of cheap energy and commodities and technological innovation. There is no sign of that coming to an end. As economies re-open, there may be a short inflationary shock, but then it will settle down.
Finally, the Budget raises an even bigger question. What is the strategy of the Government? What is Boris Johnson’s vision for the future? Many of us thought that, with Brexit done and the vaccines throwing the virus into retreat, we could at last look forward to an era of growth and prosperity, of hope and opportunity, of nation-building and cohesion. Apparently not, if the Treasury has its way.
George Osborne said this week that the corporation tax rise may never happen. Let us hope he is right. What is required in its place is a dose of optimism and reform.
George Trefgarne is founder and CEO of Boscobel & Partners.