We are used to thinking of the Tories as the party of small government, of lower and less complicated taxes. But this, the first Budget of Boris Johnson’s administration, tells a very different story.
And for all the panache of Chancellor Rishi Sunak’s performance yesterday, there are some big numbers on both sides of the balance sheet to ponder.
So how do the sums add up?
The most striking of Rishi Sunak’s announcements was the commitment to ‘invest’ an extra £90.1billion on infrastructure and science and technology. This will increase Government spending on such projects to a staggering £640billion.
The most striking of Sunak’s announcements was the commitment to ‘invest’ an extra £90.1billion on infrastructure and science and technology. This will increase Government spending on such projects to a staggering £640billion.
It is this investment in the future, which ranges from HS2 to a huge boost in support for research and development, that is designed to produce the extra 2.5 per cent increase in produc-tivity that the Chancellor mentioned in his speech.
What he didn’t say is that the boost to productivity could take decades – rather than just the five years covered by this Budget – to have any real impact on growth and households.
To provide the leeway for this extra capital spending, the Government has moved the goalposts on spending limits yet again – for the 16th time in the past decade.
For investment spending, for example, the Tories have increased the amount they can spend from 2 per cent of national output to 3 per cent. The Chancellor is certainly being helped in his spending endeavours by an era of super-low interest rates which, between now and 2024/25, will save the Exchequer £37billion.
As for the increase in day-to-day spending – a hefty £112billion over this Parliament – he is essentially planning to fund it through higher taxes.
For investment spending, for example, the Tories have increased the amount they can spend from 2 per cent of national output to 3 per cent. The Chancellor is certainly being helped in his spending endeavours by an era of super-low interest rates which, between now and 2024/25, will save the Exchequer £37billion
The Budget ‘red book’, which provides the arithmetic behind the public finances, shows that the money will be raised by postponing a cut in corporation tax, by ending the subsidy for ‘red’ diesel used by off-road and commercial machinery (except for farmers), by a new tax on digital giants and by all-but abolishing the tax relief designed to encourage entrepreneurs.
In addition, as in most recent budgets, HM Revenue & Customs has been granted new resources to catch tax cheats in measures that the Chancellor yesterday claimed would raise almost £4billion.
When it comes to the challenge to Britain’s economic wellbeing that is posed by coronavirus, Sunak (and the governor of the Bank of England) have largely been free to tackle the medical emergency with all the financial weapons at their disposal, without having to look over their shoulders to Brussels.
The Chancellor was able to announce an extra £30billion to be poured into the UK economy in the 2020/21 financial year unconstrained by the European Union’s cumbersome fiscal rules,
Similarly, because we are outside the eurozone – where interest rates are standard across all member countries – the Bank of England could act unilaterally, slashing lending rates to just 0.25pc and allowing high street banks to offer up to £290billion of extra loans at cheaper rates to UK businesses. Contrast this with Italy, where recent populist governments have been in a constant battle with Brussels over how they spend their budgets.
Now, in the midst of an escalating coronavirus crisis, the Italian authorities are offering homeowners a break on mort-gage payments in an effort to ease the devastating economic impact.
It is a sensible gesture during a once-in-a-generation health crisis, but it is unlikely to go down well with eurozone paymasters at the European Central Bank in Frankfurt who, for many years, have been responsible for keeping afloat the sinking Italian banking system.
Our own coronavirus measures, outlined by the Chancellor to help the NHS, small businesses and individuals, amount to an initial cost of £12billion (none of which, incidentally, is fully accounted for by the independent Office for Budget Responsibility, which produces the economic and fiscal forecasts around which chancellors write their budget documents). It is this extra cash for the emergency that will take some of the political sting out of the slew of additional public spending that could have come from the Labour playbook of Gordon Brown, and could not be more different from the frugality of Sunak’s Tory predecessors.
What is so striking is that, for the first time in the nation’s history, public spending and taxation will both breach the £1trillion barrier.
As a percentage of GDP, or total national wealth, taxes will stand at 34.6pc – the highest figure since Harold Wilson’s Labour government of 1969.
Britain’s most famous economist, John Maynard Keynes, was an advocate of using public works to alleviate economic slump in uncertain times. Under the cover of the coronavirus, and unfettered from Brussels, it is an approach that has been adopted lock, stock and barrel by Sunak.
Only time will tell if it is a gamble that pays off.