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Budgets are overrated

Taxation and spending make little difference while Britain is unable to build

Budgets are overrated for a variety of reasons.

Firstly, Budget speeches contain too many make-work (or rather, make-talk) schemes for the next Budget or the next Autumn Statement, often in the form of temporary freezes on this or that (e.g. alcohol duty, fuel duty), which can then be extended at the next fiscal event. In this way, the government can, in effect, announce the same policy twice, getting more headlines out of a given policy. 

More importantly, Budget speeches also cover too many spending announcements on what should really be local matters, not national ones: a few quid for a theatre in this town, a few quid for church repairs in that town, and a few more quid for a cultural institution somewhere else, etc. This is usually mostly an excuse for name-dropping places, and, if they are in the same party as the Chancellor, the “Right Honourable friends” representing them.

This spectacle is, however, inevitable given the UK’s absurdly overcentralised tax system. It would make no sense at all in a place like, say, Switzerland, where local and regional governments are largely self-funding, meaning, they have to raise their own taxes, and can then spend their revenue as they see fit. In the UK, on the other hand, about two thirds of local government revenue consists of transfers from the national level. So of course the British Chancellor wants to take the credit for popular spending on local projects, which the Swiss Federal Finance Minister would never bother to mention, or even claim to know anything about. 

A third reason why Budgets are overrated is that, unless they are fairly drastic, matters of taxation and public spending are not actually all that relevant for the UK’s economic performance.

A lot of Britain’s economic policy debates are still framed in big-state-vs-small-state terms: do you want higher taxes and higher public spending, or do you want lower taxes and lower public spending? This is a hangover from the long 1980s, when that question really was the single best predictor of someone’s overall political view, and so we still squeeze contemporary debates into this framework. The political Left believes that “austerity” has cut the British state to the bone, while “Trussite” conservatives believe that the tax burden is weighing so heavily on the British economy that tax cuts would pay for themselves. The boring truth is that Britain is a fairly middle-of-the-road country in terms of taxation and public spending. Total tax revenue comes to a little over 35 per cent of GDP, which is slightly above the OECD average, but still at the lower end by Northwestern European standards. 

on the whole, Budget-related issues are not the main reason for Britain’s economic stagnation

Some taxes really are highly distortionary, and some selected tax cuts really would have pronounced “Laffer Curve” (i.e. self-financing) effects. But on the whole, Budget-related issues are not the main reason for Britain’s economic stagnation, and no Budget is going to drag Britain out of this hole. I realised that a few years ago when, ahead of a Budget, I was asked to draw up a “wish list” of growth-boosting policies I would like to see in the Budget, and realised, half-way through, that most of those were not really Budget measures at all, at least not in the conventional sense. They had a lot more to do with Britain’s inability to build anything, be it residential housing, business premises, infrastructure, energy generation sites, or even water reservoirs. 

As far as Budgets go, this week’s was not especially terrible. Cutting National Insurance rates by two percentage points counteracts the effective tax increase from fiscal drag, which results from the freezing of the relevant income thresholds at a time of high inflation. Basing entitlement to Child Benefit on household income rather than individual income makes a lot of sense, and should have been done much earlier. (Although it would have made even more sense to roll Child Benefit into the means-tested Child Tax Credit, which is already based on household income. That would have had the added benefit of greater simplicity, and it could have been used to achieve some relatively painless fiscal savings.)

The Chancellor also hinted at the possibility of ending the — now largely illusory — distinction between Income Tax and National Insurance Contributions, in the longer term. Such a distinction is only meaningful when National Insurance Contributions are paid into a separate, independent National Insurance Fund, and when there is a clear link between the contributions you pay, and the benefits you are entitled to. This has long ceased to be the case in the UK, which just leaves us with two income taxes for no reason. 

The best thing about the Budget was what was not in it, although it had been floated before. The idea of a “Brit ISA”, which would have trapped savings in the stagnant British economy, was not dropped entirely, but downgraded to the point of being little more than a gimmick, which will not do any good, but probably not much damage either. Which is fitting, because this would be a fair way to summarise the Budget as a whole. Or, for that matter, the Conservatives’ entire 14 years of government.  

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