A Budget free of drama will serve Brexit Britain’s needs
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The only good thing about having a second Budget this year is the opportunity it provides to erase memories of the first one. Philip Hammond must surely wish that he could forget his U-turn earlier this year, when he was forced to abandon his tax rise on the self-employed within a matter of days. This coming Wednesday, the chancellor of the exchequer should above all play it safe, try to avoid too much slippage on the public finances, and start to set out a serious agenda for tackling the UK’s longstanding economic weaknesses: poor productivity, low rates of long-term savings and a dysfunctional housing market.
The central political fact of this parliament is the government’s tiny working majority in the House of Commons. Even with an overall Conservative majority, George Osborne, the previous chancellor, was forced to abandon a series of policies that required votes in the Commons, such as plans to cut tax credits. Unable to depend on Democratic Unionist MPs outside the narrow confines of their governing agreement, the May government’s working assumption should be that any controversial votes on tax rises or spending cuts will be lost.
This is far from ideal, for the Conservative party and for the country. However, unless we encounter another economic crisis in the next few years, it does not make governing impossible. The public finances are no longer an immediate threat to economic stability; the deficit is down from a postwar record of 10 per cent of gross domestic product to 3 per cent.
Of course, the UK still has significant fragilities, with high levels of debt, a large banking system and a persistent dependence on overseas capital flows. The longer-term ambition — to run a balanced Budget in order to reduce government debt as a share of GDP — should remain. Otherwise we risk entering the next economic crisis almost as vulnerable as we were in 2007. But with fading public tolerance for spending cuts and the economic uncertainty generated by Brexit negotiations, now is not the time to double down on that ambition. Instead, Mr Hammond should focus on keeping fiscal slippage to a minimum while avoiding political risks.
Some in his party will be disappointed by a cautious Budget. But the risks from radical, headline-grabbing announcements are far greater than any potential gains. Talk of reforms to the VAT threshold for small companies rings all the same alarm bells that the increase in national insurance for self-employed people did six months ago.
More useful would be some quiet, longer-term radicalism in tackling the UK’s underlying problems.
Weak productivity, in both the private and public sector, is the common thread that ties together slow growth in living standards, poor public finances and strained public services. This is a global trend, and many of the policy solutions are well known: a tax system that encourages investment and innovation; better skills, especially technical; better infrastructure; support for science and new technologies; co-ordinated local investment.
On taxation the UK scores well internationally — a motivation for those trying to reform the tax code in the US. The main challenge is consistent policy and delivery on skills and infrastructure. The national infrastructure commission may help.
If Mr Hammond wants some exciting announcement on productivity, he could try and bring to life the potential for new technologies to transform our economy. National Health Service patient data are a unique global asset that artificial intelligence could harness to develop new treatments. Autonomous vehicles will disrupt industries and reshape our lives — why not team up with one of the developers and pilot a driverless taxi service in a UK city?