The budget dilemma

The Institute of Fiscal Studies Green Budget has been a big feature on the airwaves this morning. Understandably so, because it is authoritative and non-partisan and Spreadsheet Phil will be delivering his verdict in less than two weeks: Green Budget

I expect a holding budget with the big public expenditure decisions being delayed until next year. That is only reasonable with so much uncertainty surrounding Brexit. If we crash out, we may need a mild fiscal stimulus.

The fundamental problem is, as always, the public demand for American taxes and Scandinavian public services. Actually, the gap between UK and US taxes as a percentage of GDP has narrowed, although, of course, the US spends more on defence. We have surrendered our previous mid-Atlantic position. There is a lot of grumbling about the highest tax take since the 1940s, but tax as a percentage of GDP is still well below levels in most other European countries.

However, the challenge for Phil is to find ways of increasing taxes without upsetting voters (fuel duty levy) or Conservative voters and backbenchers (national insurance charges for pensioners, reducing tax allowances on pensions). As the IFS makes clear, just to pay the NHS bill and stop all other cuts will require significant tax increases. There are many who think that local government, the police, prisons and some aspects of education need more money.

The prime minister proclaims that austerity has ended, but when Phil reasonably points out that this will mean rowing back on some manifesto promises on tax, he gets slapped down.

Hammond's budget dilemmas

One light was on in No.11 Downing Street in the early hours. Was Phil Hammond putting some finishing touches to his budget?

Phil Hammond is caught between a rock and a hard place, both politically and economically. Politically the Brexiteers in the Cabinet and the party want to get rid of him as the influential remoaner in chief. Whatever kind of budget he produces, it won't call off the hounds.

Economically, he has little room for manoeuvre. He has to produce a Budget that will reboot the Conservative Party but remains fiscally circumspect. With an underlying productivity problem and poor medium-term growth forecasts, that would be a challenge for anyone.

'Spreadsheet' Phil is not the most charismatic politician by a long way. Asked to describe himself with a single word recently he said 'fiscal'. Very commendable, but hardly likely to set the world alight. Despite the usual leaks which means that these days most of the Budget is known in outline before it is delivered, he has been criticised for not personally setting out his stall in the run up to his speech.

Normally the first Budget of a new Parliament would set the narrative for the governing party. An attempt will be made to make housing a central theme as the Conservative Party seeks to claw back the votes of millennials. However, what is likely to be offered is a series of worthy incremental measures rather than a grand strategy that will signal a new direction.

So it looks like a Budget that might be economically sensible, but a political failure whatever it offers.

'Spreadsheet' Phil is weakened but safe

The relationship between the prime minister and the chancellor of the exchequer is the most crucial one in British government, but it hasn't been studied very systematically, although I attempted a typology in my Economic Policy in Britain.

'Spreadsheet' Phil Hammond has suffered a blow to his reputation after he was forced to withdraw his increase in national insurance charges for the self-employed. The expressions of studied neutrality on those around him as he made his statement yesterday told their own story.

The line from Downing Street is that the Chancellor was warned beforehand about the political risks of the increase, but felt he had to go ahead to meet new spending demanded by the prime minister. Indeed, the Treasury line is that the prime minister and her aides are too keen to spend additional money, although something had to be done to provide additional funding for social care. Quite how the £2 billion hole in what was a fiscally balanced budget is going to be repaired remains to be seen. The Government has boxed itself in by its manifesto pledge not to increase income tax, VAT or national insurance, the main means of raising revenue.

In the longer run, something is going to have to be done about the erosion of the tax base by the growing numbers of self-employed, some a by-product of the digital economy, but many of them attracted by the tax benefits which include allowances not available to the employed. Employers also benefit from not having to pay NICs. However, it would have been surely better to wait for the results of the review being conducted by Matthew Taylor which will also look at the narrower range of benefits received by the self-employed. Certainly, Phil Hammond did not display much political awareness.

In the longer run, there is a need to look at the rationale of separating national insurance and income tax. National insurance is another form of income tax, but one not applied to particular groups such as the elderly. Whether any party would be prepared to tackle this particular hot potato is open to question.

What is the immediate political fallout from this U-turn? It shows that the Government is vulnerable to determined resistance by small groups of backbenchers, given its slim majority. School funding formulas will be the next target. It also showed once again that Jeremy Corbyn is unable to take advantage of government errors.

The SNP economy spokesman suggested that relations between No. 10 and No. 11 could revert to the days of Tony Blair and Gordon Brown. That will not happen because Phil Hammond has no ambitions to be prime minister. He is a Derek Heathcoat-Amory rather than a Gordon Brown. From Theresa May's point of view, it suits her to have a weakened chancellor beholden to her so his job is safe for now.