Tory Budget splurge leaves Britain living beyond its means

“Austerity is coming to an end but discipline will remain.” This soundbite from today’s Budget statement summarises what the Chancellor Philip Hammond says he is trying to achieve. He has sought to promote the perception that government fiscal policy is at point of fundamental departure as it takes the momentous decision to end a decade of austerity, while simultaneously trying to cling to the Conservatives’ reputation for economic responsibility. Unfortunately, by accepting Labour’s understanding of economics and singing to their tune, spreadsheet Phil is at risk of convincing nobody of either claim.

There were some good things in this Budget that arise from a conservative view of how wealth is generated. A one-third business rate cut for independent retailers with a rateable value of £51,000 or less is a welcome break for the high street in an era when online shopping is driving traditional stores out of business. The newly announced digital services tax that will seek to raise a fairer level of revenue from international tech giants such as Facebook, Google and Amazon must be understood in this context; as well as seeking to rectify an obvious inadequacy in the tax regime, the Chancellor is showing symbolically that he supports economic fairness and is on the side of local business, not faceless dot com corporations that exploit offshore tax havens.

Freezing fuel duty for the ninth year running is costly to the Exchequer but is a worthy move; the cost of living remains high on the public agenda. Stamp Duty will be eliminated for first-time buyers making use of shared ownership arrangements for properties under £500,000, which represents a useful development of the existing break for all first-time buyers purchasing properties under £300,000. This will hopefully boost liquidity in the flagging housing market as well as help with access to property, the Tories’ single biggest electoral weakness and demographic threat. Technical reforms to local spending and borrowing rules should see an improvement in the spread of ownership – capitalism doesn’t sell if you don’t own any capital.

The most important (and encouraging) headline-grabber was the decision to press ahead with raising income tax thresholds to £12,500 for the basic rate and £50,000 for the higher rate, and actually to bring this forward by one year to 2019, delivering the promise ahead of schedule in defiance of expectations. This will compensate for fiscal drag and mean real money back in taxpayers’ pockets.

However, herein lies the rub: higher than expected tax receipts have generated a £13 billion revenue “windfall” that has allowed the Chancellor to keep his income tax pledges, but the rest of this boost to funds has not been put to responsible use – i.e. deficit reduction or a meaningful dent in public sector net debt.

Instead, the Chancellor has agreed – contravening the 2010 Tory pledge to balance the books – to the notion that the deficit will actually rise (in effect by around £30bn) in order to fund various spending increases on schools, potholes, infrastructure, training, an injection to Universal Credit and, of course, the NHS (the latter making up the vast majority of the spending splurge).

Now, not all the Chancellor’s new spending commitments are inherently bad. Some increased spending on the troubled Universal Credit welfare reform programme is necessary but measures to ease its implementation and smooth out the “taper” experienced by taking on more work make sense.

But Hammond has completely abandoned the notion that fiscal restraint should be an overriding goal of a sensible government. With poor growth forecast by the OBR (the Office for Budget Responsibility) for the next 5 years (not topping 1.6%) and debt at 83% of GDP, it’s not at all clear that the immediate economic future is going to see the kind of growth and revenue generation that will make far looser spending plans affordable.

Labour will always outflank the Tories on spending by making pledges the government can never afford to match, but Labour-lite economics is unlikely to be a win with the voters. Polling and focus groups show historically that if you sell the electorate a watered-down version of an idea, on the day they plump for the real thing. Accepting that ever greater spending is always the answer and can be afforded concedes the economic centre ground to Corbyn and McDonnell.

Eventually there will be a reckoning in which the affordability of fully socialised healthcare and the modern welfare state (when you factor in our ageing population and low birth rate) will have to be addressed in the public conversation. By suggesting that “austerity” was simply an historically contingent, unfortunate necessity (Hammond’s own words) for which the time has passed, Hammond has shirked the opportunity pursue a serious rebalancing of the UK economy away from big budgets, big deficits and ever-expanding debt.

The UK tax burden is at a 50-year high and government spending, depending on how it’s measured, stands at about 42% of GDP. It’s extraordinary that this has been allowed to become our public consensus; Hammond’s tinkering does nothing to challenge it. Instead, it continues to propagate the myth that we can live forever beyond our means.