Sunday, March 12, 2023
A cash-strapped chancellor only has room to tinker
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. Not to be reproduced without permission.

It is the Sunday before the budget, and it is my constitutional duty to write something about it. When people ask me what to expect in it, I get a sense of what it must be like to be Jeremy Hunt. Nobody tells me “That’s interesting” or, still less, “that will be a game-changer”. The chancellor may surprise us, but the strong sense is that the government is still in repair mode when it comes to the public finances, and that he will want nothing to get in the way of this year’s expected sharp fall in inflation.

It is good rule of thumb that the more constrained a chancellor’s room for manoeuvre, the more intensive the demands on him to do big things. Some of this, for business lobby groups and think tanks, is on the principle of if you don’t ask you don’t get. When they don’t get when Hunt reveals all on Wednesday, and it falls short, they will have a built-in grievance.

Though on the face of it he does have some room for manoeuvre – the budget deficit this year coming in about £30 billion lower than the Office for Budget Responsibility (OBR) expected in the autumn – much of this is due to the temporary effect of the energy price guarantee, the freeze, costing less than expected because of lower international gas prices. There is a limited amount of follow-through to later years, particularly with the OBR set to take a more downbeat view of medium=-term growth prospects.

One of those big things that many businesses and think tanks would like him to do is not proceed with the increase in corporation tax from 19 to 25 per cent. But this is a considerable revenue-earner for a cash-strapped chancellor, and there is no suggestion that he is minded to forego that revenue.

The National Institute of Economic and Social Research (Niesr), interestingly, thinks he could do something about it, and limit the rise in corporation tax next month. But its forecasts, which are for much better public finances over the medium-term, may not be of much comfort and look different to the official ones likely to be presented this week. Indeed, its analysis has been greeted with bemusement in the Treasury. NIESR expects high inflation to last for longer, providing a boost to revenues through the so-called inflation tax, whereby higher inflation generates more revenue in cash terms.

There are worries, rightly, that the hike in corporation tax, coinciding as it does with the end of the co-called “super deduction”, under which 130 per cent of qualifying business investment can be offset against corporation tax, will create a cliff-edge for business investment, sending it tumbling again. As has been reported, some form of more generous investment allowances, though not as generous as the super deduction, are set to be announced to fill part of the gap.

Businesses have started to look enviously at what is happening in America, with Joe Biden’s Inflation Reduction Act IRA), which provides big subsidies to invest in US-based green technology and which is seen as a magnet to pull investment out of Britain and to America,

The Institute of Directors, the business organisation which once proudly carried the Thatcherite flame, wants a similar act for the UK and nearly 80 per cent of its members surveyed backed the idea.

“The Inflation Reduction Act in the US is a game changer which cannot be ignored by UK policy makers,” said Dr Roger Barker, the IoD’s head of policy. “It provides substantial incentives for companies to pursue green innovations and green technologies in the United States rather than in the United Kingdom. The EU is also raising the stakes through its ‘Green Deal Industrial Plan’ which, amongst other things, is proposing a significant relaxation of the EU’s state aid rules when it comes to investment in green technology.

“A particular concern is that short-term budgetary concerns will override the strategic imperative of establishing market leadership positions in green business. It’s imperative that government and the private sector work together, otherwise the UK will find itself left behind in the accelerating race to lead the green economy.”

If the government is to introduce its own IRA, it is keeping it very well hidden. Indeed, Kemi Badenoch, secretary of state in the new/old department of business and trade, described it last month as both protectionist and risking further problems for problems for global supply chains. Barring a Damascene conversion, this does not look to be on the table.

Hunt is set to use £6 billion of the limited resources at his disposal by maintaining the 5p a litre cut in fuel duty announced by Rishi Sunak when he was chancellor a year ago. He will also, as is customary, not raise the duty in line with inflation, government policy since 2011. That is no surprise but the clear political difficulty of reversing the cut helped explain why it was so modest a year ago, in contrast to many other countries. The Treasury knew that this was one cut that was never likely to be reversed.

Not only that, but some motorist lobby groups are not happy with a mere duty freeze. They want a further cut, even though petrol and diesel prices are lower than a year ago.

When you list all the other things that the chancellor has to do, including maintaining the energy price guarantee at £2,500 until the summer, providing extra resources for the defence budget and to settle public sector pay disputes and, it is suggested, something useful for childcare and tackling the increase in inactivity among older workers, it soon adds up, and any short-term room for manoeuvre is soon exhausted.

Budgets are political events and I don’t think I am breaking and state secrets when I tell you that most are small, “tinkering” affairs. We became accustomed to massive fiscal events during the pandemic, most outside the normal budget timetable, with huge sums sloshing around. September’s mini budget from Kwasi Kwarteng was perhaps the most badly named ever, including as it did giveaways that were several times what would be expected in a normal budget.

We are in back in normal, “steady as she goes” territory, focused on continuing the repair of the public finances and ensuring that inflation does fall. The question is whether Hunt and Sunak’s quietly competent approach will be enough. Tory MPs want something to take back to their constituencies to begin the process of eating into Labour’s large opinion poll lead.

Hunt ended his Autumn Statement ended with a flourish, announcing that the triple lock would be honoured, implying a big increase in the basic state pension next month, alongside a significant hike in the minimum wage, the national living wage. As a rabbit out of the hat, it was a bit mangy.

There will be another rabbit this week, and we will have to wait until Wednesday – assuming not everything is briefed or leaked beforehand – to see what it is. But don’t expect it to be transformational. These things take longer.