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Having seen a fair few in my time, I have decided that there are three lenses through which one can see the budget when it comes to uncovering the government’s growth strategy.
The first looks only upon the stuff the chancellor announced on the day. A second gazes instead upon all the missing pieces: every policy idea the commentators have called for, which might have made a difference had the chancellor only possessed the commentator’s courage or insight. The third lens looks upon the much larger quantity of past policies already being enacted, but little discussed on budget day because to do so is extremely tedious. If you need an image, picture an iceberg with a tiny protuberance of budget-day talking points above the surface, and large mass of what is already there below.
But what really matters for immediate relevance is what the Office for Budget Responsibility thinks, which ultimately determines what the government can assume about growth over a five-year horizon, which in turn determines what it can do. To contemplate this part demands heroic levels of Stoicism, because the OBR analysis is a remorseless reminder of the size of the growth challenge. How puny are the measures of the chancellor when set against the sheer quantity of what is already there: the £4.5trn of capital, the 32 million already working, our countless laws, customs, rules and regulations, and Britain’s relatively small position in a largely indifferent global economy. Very little moves the dial. Using this lens, the UK’s growth model, once the budget dust has settled, is pretty much what it was before.
Jeremy Hunt should be applauded for shifting the dial on growth
Was Jeremy Hunt’s budget any different? We should start with credit where it is due. The biggest immediate challenges for growth policy are to boost the UK’s effective labour supply, which has fallen by half a million since the pandemic, and to improve investment incentives ahead of a sharp rise in corporate tax rates and concurrent expiry of the Super Deduction tax allowance. Looking through the first lens, Hunt has acted on both, committing £7bn to a slew of measures on labour supply – notably, childcare support but also changes to welfare and back-to-work policies – and roughly £8bn a year to the full-expensing of capital expenditure, for three years.
In response the OBR made its largest-ever upward revision to potential output that can be credited to government decisions on the day – a fifth of a percentage point of GDP. No chancellor since 2010 has ever actually raised potential GDP by that much. That is not because the OBR has proven too miserly; if anything, it has been too generous in the past, given a decade of forecast productivity recoveries that have subsequently failed to materialise. Unfortunately, however, the entirety of this upgrade reflects the small (110,000) forecast rise in the future labour force – worthwhile, but not even as much as a quite fortuitous projected rise in net immigration that was also factored into the OBR’s latest forecast. The OBR gives no growth marks to the expensive raising of capital allowances, because the measure is temporary, for now. A great many voices are calling for full-expensing to become permanent, which is the chancellor’s aspiration, but one that butts up against his need to forecast a falling debt-ratio at the five-year horizon.
Nevertheless, for shifting the dial at all the chancellor should be applauded, even though his measures are expensive for the results they achieve. The small total effect – 0.2 percentage points of GDP is about a twentieth of the impact of Brexit (4.0% in the opposite direction) – is simply a reminder of how hard it is to transform the performance of a large, mature economy.
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