Sunday, March 15, 2020
The chancellor places his bets on a £1 trillion gamble
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

It is always a challenge writing about a budget a few days after the event, particularly when the ensuing period has included a further big slump in the stock market – making this bear market very grizzly - the government’s response to the coronavirus outbreak moving into a new phase and Donald Trump’s ban on travel from most European countries to America.

There is the bigger question of whether the impact of Covid-19, on public health, society and the economy, will be so severe as to make the budget irrelevant. I do not want to be alarmist about this, and have not been, but the dangers cannot be ignored and a recession now looks very likely. It is not every week, after all, that you get a 7 am announcement of an interest rate cut and other emergency measures from the Bank of England.

But let me draw you in. Once upon a time I used to write about budgets in terms of millions. Then we moved on to billions. Now, we can talk about trillions, in other words thousands of billions, as will be explained in a moment.

Let me draw you in also with a couple of bits of history. When I saw a headline “Stonehenge scheme gets go-ahead”, my first thought was that they had finally got some ancient Britons to drag some more bluestones from the Preseli Mountains in Pembrokeshire to finish it off. But no, it was another bit of ancient history, a two-mile tunnel for the A303 near Stonehenge which, as the former chancellor Lord (Alistair) Darling revealed, he had given approval for when transport secretary nearly 20 years ago.

There is a bit more history. The government’s fiscal watchdog, the Office for Budget Responsibility (OBR) said that the plans announced by Rishi Sunak on Wednesday represented the largest budget giveaway, in the form of higher public spending (the government is raising taxes overall) since March 1992.

I remember that episode well. When I wrote a piece pointing out the extent of the Tory government’s spending largesse, it was picked up and written about by William Rees-Mogg, father of Jacob.

Things changed. Michael Portillo was appointed Treasury chief secretary after the April 1992 election and was irked to find that he was presiding over a spending splurge. That and the Black Wednesday crisis a few months later, when the markets forced sterling out of the European exchange rate mechanism (ERM), brought a big change. Instead of a big spending boost, the Tory government adopted plans that, in the words of Kenneth Clarke, the then chancellor, were “eye-wateringly tight”. It remains to be seen whether anything like that is the fate of this government’s plans.

I promised some trillions in the context of the budget, so here they are. In two years’ time, on the new plans, overall government spending, total managed expenditure in the jargon, will reach £1 trillion for the first time ever in 2022-23.

That is up from £851bn in 2018-19, the last full year for which we have data. It represents a more-than-doubling in less than 20 years compared with 2003-4, when spending was less than £500bn. Adjusted for inflation this is more than a 40% real rise.

Government receipts, mainly taxes, are also on track to top £1 trillion, although not until a couple of years later, 2024-25. The tax burden – and the government is raising taxes overall – will be its highest since the late 1960s.

The other trillion-pound number is for government debt, currently just under £1.8 trillion, and predicted to reach £2 trillion within five years. That is another big number. The budget added £125bn to debt.

The government, incidentally, no longer has ambitions to reduce government debt in relation to gross domestic product. The OBR describes it as “essentially flat” in the later years of its forecast, at around 75% of GDP. Adjusted for the Bank of England’s term funding scheme it rises slightly.

With so many big numbers around, it was a pity that Sunak, in a polished first outing as chancellor, decided to exaggerate some of his budget numbers. He claimed a £30bn fiscal stimulus to support British people and British business “through this moment” but the coronavirus crisis response is only £12bn, though comprehensive in tandem with the Bank’s moves. The rest comes mainly from adding Sajid Javid’s spending boost, announced last September, when this coronavirus was yet to reveal itself.

The chancellor also talked about providing a £175bn increase in infrastructure spending, a figure which you can only get to by using the multiple counting method which was discredited when employed by Gordon Brown more than two decades ago. Properly measured, on the Treasury’s own scorecard, that addition to capital spending over the next five years is just over £80bn. That is big enough to need no exaggeration.

Also on the Treasury scorecard is the fact that, though most of the emphasis in the budget was on levelling up via infrastructure spending. Most of the increase in spending by the end of the parliament, however, roughly 56%, is on day-to-spending. No wonder the Treasury is examining changes in the fiscal rules that will enable some education spending to be defined as human capital spending and thus be included in the definition of capital expenditure.

How risky is all this? Before the budget the OBR could look forward to a period in which public borrowing headed down from just over £47bn this year to £30bn by the end of the parliament. Now it is predicted to rise, reaching a peak of nearly £67bn in 2021-22 and still close to £60bn by the end of the parliament. Serious coronavirus effects on the economy will add to borrowing, certainly in the short term.

This shift from austerity and fiscal responsibility to Lady Bountiful largesse has had a sobering effect on the free-market think tanks in Westminster. Most have concentrated on individual measures, which they can welcome because in a long-forgotten paper they have recommended them, rather than the big picture. But the Adam Smith Institute broke cover by accusing Sunak of “spending like a drunken sailor” on “vanity projects” which will not make us better off, while the Institute of Economic Affairs was concerned about a chancellor who “seems to think the only best way to boost growth is through public spending”.

For the moment, that battle has been lost. The Tories are content merely to stabilise debt and to allow spending to settle at nearly 41% of GDP, compared with the sub-35% level when Margaret Thatcher left office 30 years ago.

More than the concerns of the think tanks, Sunak was probably stung by the comparison made by Robert Chote, the outgoing OBR chairman, between the chancellor now and Gordon Brown in the run-up to the global financial crisis. When the tax revenues are coming in and when, as now, governments can borrow very cheaply, spending a lot more public money looks like the sensible thing to do. Things are “priced for perfection” But when any of this changes it starts to look very risky. The chancellor has taken a £1 trillion gamble.