Rishi Sunak is an ambitious man who hopes to be the next Prime Minister. His Budget today is an attempt to steer a course between the prejudices of his boss, Prime Minister Boris Johnson, and those of his Department, the Treasury.
The essence of Borisism is that the fundamental law of economic gravity, that you can only spend the same money once, can be subverted, at least in the short term.
The Treasury has various idée fixe. One is that it is the department’s responsibility to keep public finances under control, the precise opposite of Borisism. Another is a scepticism that seems to go way beyond ordinary common sense about the Laffer curve, the idea that taxes above a certain amount reduce rather than increase revenue.
Faced with an economy that is clearly overheating and has a substantial budget deficit yet at the same time is dropping in the tax competitiveness league tables, one would expect the Budget priorities to be reducing inflationary pressure, easing the supply constraints and reforming taxes and public services to get more from less. All this while avoiding upsetting either his boss or his Department.
The Chancellor has been helped by his team’s earlier forecasting errors which meant that the UK’s economic growth has been running ahead of assumptions. But his forecasts are put at risk by the extent of the inflationary pressures. Although it is technically the task of the Monetary Policy Committee to handle inflation, Sunak will get the blame if it all goes wrong. And UK officialdom has appeared dangerously complacent in the face of rising input prices, shortages of goods, shortages of labour and upward wage pressure, all fuelled by fiscal and monetary laxity. The inflation forecast in the Budget for 2022 has now caught up with our own forecasts with a prediction of 4% inflation next year, even after the freezes on fuel. The Chancellor is betting on it falling back of its own accord in 2023.
There is a new fiscal framework, slightly more lax than before. One’s suspicion is that this won’t help if inflation appears to be running out of control where the real pressures on the MPC will come from the financial markets, not the framework. Public spending has been boosted, by a total of £141.1 billion over the next 5 fiscal years. And although there are tax reliefs announced in the budget, they pale into insignificance compared with the £17 billion a year tax rise from the National Insurance increase announced a few weeks ago and the expected yield of £7 billion by 2026/27 from changing the system of pensions uprating.
Many of the policies adopted in the Budget reflect Cebr advice including the changes in alcohol duty, the freeze in fuel duty, the increased funding for the arts, the rates relief for retail and hospitality and the tax reliefs for maritime. We didn’t recommend the cut in duty in sparkling wine but as one of us lives in Tenterden, the town that is England’s equivalent of Rheims and the centre of UK production of sparkling wine, we can hardly disapprove! We also approve of the reduction in the Universal Credit taper to make work pay.
Will it all work and help Rishi Sunak’s premiership ambitions? It all depends on whether inflation falls in 2023 as he forecasts. If it does, a very confident Budget might well be seen as a vote winner. If it doesn’t, all bets are off.
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