RUTH SUNDERLAND: Free spending and fiscal laxity may be the right thing in extremis, but they should not become a way of life
Chancellor Rishi Sunak is walking a very tricky tightrope in his Budget next week. He needs to keep a lid on borrowing and spending without squashing the nascent recovery.
So far, money markets have been sanguine about the fact our national debt has grown to more than £2trillion and counting. Government IOUs remain highly rated and are much in demand among international investors. This happy state of affairs, however, will only last as long as our credibility. Once lost, this is not easily regained.
Rishi, then, cannot give the impression he has let borrowing run out of control.
On a tightrope: Chancellor Rishi Sunak needs to keep a lid on borrowing and spending without squashing the recovery
Yet if he comes on too strong with the hair shirt, the danger is of hitting confidence and kyboshing the revival in the economy, which remains tentative and subject to reverses, particularly if – please spare us – more lockdowns are imposed.
Although he wasn’t even born in the 1970s era of runaway prices, Rishi is very concerned about the upward trend in inflation and the prospect of rising interest rates.
Unusually, the Spending Review, in which he allocates money to government departments, takes place on Budget day. Because of the pandemic, public spending will settle at around 42 per cent of national income, according to the Institute for Fiscal Studies, its highest in ‘normal times’ since 1985.
Even so, the NHS budget is under strain and departments such as Education and Justice have come under severe pressure in the pandemic, as has local government. Various industries are clamouring for help.
Rishi will probably be reluctant to bring in more tax hikes. These would be extremely unpopular among voters faced with soaring energy bills, rising prices and shortages at petrol pumps and in shops. On top of that, hefty increases are already in the pipeline.
Firms face a leap in corporation tax from 19 per cent to 25 per cent from April 2023, which will raise £47billion by 2026. That is a big hit, which will ultimately be paid by customers.
Business rates could rise by £1billion from April based on the September inflation figure – an area that is ripe for reform, ideally linked to an online sales tax to level the playing field between bricks-and-mortar retailers and the likes of Amazon.
As for individuals, the five-year freeze on personal allowances and bands unveiled in March will raise £19billion and the National Insurance hike revealed last month will yield £12billion a year. Ouch and double ouch.
These delayed taxes were quite clever, as there was no immediate hurt and the hope was that by the time they bit, the economy would be firing away again, making the extra bill more palatable. It might not work out quite as smoothly as hoped, and the more inflation takes off the bigger the hit from the frozen bands and allowances.
Rishi is expected to use the Budget to restate the fiscal rules, which were abandoned during Covid. They are meant to hold Chancellors to account by setting targets for public spending and the national debt.
Since Gordon Brown’s day, they have changed several times, most recently last year. Rishi could reinstate those pre-pandemic rules or more likely adopt new ones with targets for spending and debt calibrated for a post-pandemic economy. Restoring them would send a powerful signal that the Treasury’s Covid largesse was strictly temporary.
Huge sums have – rightly – been extended to keep firms and families afloat. But this vast support exercise risks undermining Tory values of self-reliance, work ethic and debt discipline. Free spending and fiscal laxity may be the right thing in extremis, but they should not become a way of life.