Sunday, March 19, 2023
Not yet a plan for growth, nor one for investment
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.

Two weeks ago, I wrote here about the need for a plan for growth, to lift the economy out of its torpor. The question this weekend, as well as the questions swirling around the banking system, is whether we now have one. It is perhaps a reflection of how low our expectations have become that an official forecast showing that the economy will shrink by only 0.2 per cent this year has become a cause for celebration on the part of the chancellor.

This is because the economy is no longer heading for a “technical” recession, two successive quarters of falling gross domestic product (GDP), according to the Office for Budget Responsibility (OBR). I have written before about the daftness of this definition, invented for political reasons in America in the 1960s and not generally used there. As it is, the OBR expects GDP to fall this quarter and remain flat in April-June, despite the extra bank holiday for the King’s coronation, so it could be a close-run thing.

Let us face it though. Every time in the post-war period that there has been an annual fall in GDP, which the OBR is just about predicting, it has met the sensible definition of recession. But the best way of describing the economy this year is one I have been using for quite a while, which is that it will be broadly flat, as it has been over the past year or so, as long as those banking vulnerabilities do not evolve into something more serious.

But back to that question of whether Jeremy Hunt provided us with a plan for growth in his budge, which was his first. Though it seems he has been at the Treasury for a long time, is it is only just over five months since Liz Truss (remember her?) turned to him to calm things down.

In my piece a fortnight ago, I quoted Michael Saunders, formerly a member of the Bank of England’s monetary policy committee (MPC), now a senior adviser at Oxford Economics. His verdict was that Hunt had given us “the faint outline of a plan to improve the economy’s supply-side and lift the economy’s dismal medium term growth trend, with the measures on childcare, labour supply, investment allowances and pensions”.

A faint outline, a useful first step, is a good way to describe it. Paul Johnson, director of the Institute for Fiscal Studies, said the chancellor had “laid out some elements of a sensible strategy to support growth”, though adding that: “There is plenty to quibble with, but if you want to focus on growth there is at least some of what you might want here, attempting to deal with incentives to work and to invest.”

The budget measures to bring more people into the workforce deserve praise. They are the kind of policy that should be part of a plan for growth, particularly the chancellor’s emphasis on free childcare, a further expansion of the welfare state. Not only were they part of the plan for growth outlined here recently but they should not become a political football. They will not be fully implemented until September 2025, after the next general election, but should not be bone of contention between the political parties.

They may not be transformational but they will make a difference, particularly for mothers who want to return to work sooner. There was less than meets the eye for over-50s who have left the workforce, however, the vast majority of whom have not done so because they risked falling foul of the now-abolished pension lifetime allowance. Lifting the allowance was fine, abolishing it looks like an unnecessary rush of blood to the head.

A proper plan for growth requires the UK to lift business investment, which seems stuck at about 10 per cent of GDP no matter what, compared with an average of 14 per cent for competitor countries. But the cliff-edge of next month’s rise in corporation tax from 19 to 25 per cent, combined with the end of the 130 per cent “super deduction” of qualifying investment against corporation tax, threatened to push it down.

For the past year some of us have been puzzling about what the chancellor would do to offset this. When, just over a year ago, Rishi Sunak promised measures to support investment in the face of the rise in corporation tax from 19 to 25 per cent, he ruled out full expensing as too expensive. But full expensing, a 100 per cent allowance against corporation tax is what was announced for three years in the budget.

It is a reminder of the mess that the four Tory chancellors of the past three years have made of the tax system. When Sunak was chancellor under Boris Johnson and under pressure to shelve the planned rise in national insurance in the wake of the cost-of-living crisis, he responded by increasing the threshold at which is starts to be paid. A higher tax rate but more generous reliefs.

Now Hunt, no doubt after close discussions with Sunak, has done something similar for corporation tax, sticking with a big increase in the rate but softening the blow (and using up revenues) by announcing a big, if temporary, increase in tax allowances.

Oxford University’s Centre for Business Taxation noted that this is a direct reversal of the corporation tax reforms of the 1980s, by Nigel Lawson, one of Sunak’s heroes, which were all about reducing the tax rate and paying for it, at least in part, by reducing allowances. It agrees with the OBR that the new allowances should provide an immediate investment boost.

The question is what comes next. The sugar rush from full expensing will not last too long and the OBR thinks the net result will be to leave business investment in the longer run lower than it expected last autumn. The economy will still be stuck with low business investment.

It looks like the chancellor has put a cuckoo in the nest. In three years, when the new allowance is due to come to an end, the same “cliff-edge” concerns that were there in the run-up to this budget will re-emerge.

Hunt could not extend the new scheme beyond three years in his budget, because to do so would mean he would fall foul of what looks like an undemanding fiscal rule, which is to have government debt falling relative to GDP in five years’ time. On the latest projections, he meets it, but only by a £6.5 billion whisker, the smallest of any recent chancellor.

It may be that the public finances will improve by more than that. It could be that the economy will overcome the vicious circle of a rising tax burden made necessary by slower growth. It could even be that, once businesses have got in the habit of investing more, they will continue.

Or, perhaps, the chancellor knows that three years down the line, it will be somebody else’s problem.