All dressed up for the budget, but nowhere to go Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. In all the years I have been covering budgets, I cannot remember the run-up to one, for that is what until Thursday night we were in, to be quite as odd as this. Maybe that was why the usual full pre-budget speculation mode, my e-mail inbox overflowing with budget demands from everybody from the CBI, Institute of Directors and British Chambers of Commerce to the Federation of Licensed Victuallers Associations, was more muted than normal. The budget, it seems, has fallen foul of the government’s parliamentary game-playing, cancelled because of the opposition’s expected
David Smith considers the following as important: David Smith's other articles
This could be interesting, too:
David Smith writes Spend, spend, spend, but beware the bond market
David Smith writes Beyond Punch & Judy, some good ideas for the economy
David Smith writes Can the next Bank governor avoid negative interest rates?
David Smith writes The long and the short of Johnson’s Brexit deal
All dressed up for the budget, but nowhere to go
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
In all the years I have been covering budgets, I cannot remember the run-up to one, for that is what until Thursday night we were in, to be quite as odd as this. Maybe that was why the usual full pre-budget speculation mode, my e-mail inbox overflowing with budget demands from everybody from the CBI, Institute of Directors and British Chambers of Commerce to the Federation of Licensed Victuallers Associations, was more muted than normal.
The budget, it seems, has fallen foul of the government’s parliamentary game-playing, cancelled because of the opposition’s expected refusal this week to go along with the prime minister’s plan for a general election on December 12.
Incidentally, I know that many people reading this are thoroughly fed up with what seems like a never-ending process for what, after all, is only the first stage of Brexit, and blame a “Remainer” Parliament for its dithering and delay. In fact, if it is to be a missed deadline, the blame for that lies squarely with Boris Johnson and a gimmicky Downing Street operation, whose gimmicks have all failed.
The prime minister, with very little time on his hands, wasted it with an initial policy of not talking to the EU, an unlawful prorogation of Parliament and then a very late set of proposals which were swiftly amended when unacceptable to Brussels. To expect Parliament to rush his deal through to meet his vanity project of leaving on October 31 was a final push too far.
We should be glad that the courts, and Parliament, have prevented a government from riding roughshod over convention and proper procedure. This not a pro or anti-Brexit point; once this has happened once a future government could use the precedent established for more sinister purposes.
The need for proper Parliamentary scrutiny, by the way, is underlined by the fact that neither the prime minister nor his Brexit secretary appear to understand what they have conceded on Northern Ireland and what it will mean for business. Details matter.
Anyway, back to the non-budget and at times like this, I feel sorry for Sajid Javid, the chancellor. On Wednesday he was reassuring Robert Peston on ITV that there would be a budget on November 6, and that the only circumstances in which there would not be a budget on November 6 would be if Britain left the EU without a deal.
The chancellor, who had a rushed one-year spending review imposed on him by 10 Downing Street last month has now had the budget cancelled from under his feet.
I also feel sorry for Treasury and Office for Budget Responsibility (OBR) officials who were hard towards the expected budget in 10 days’time. Whether we will see the fruits of their labours remains to be seen, though under the Industry Act the government is required to publish two official forecasts a year, and there is not that much time left.
The question is whether this postponed budget is a lucky escape for the public finances. After all, we had one pre-election giveaway in the spending review last month, in the form of a £13bn-plus spending boost for next year.
The backdrop to the Treasury’s preparations, frustrated as they now are, was that, for the first time in many years, the public finances are deteriorating. Borrowing last month was up on a year earlier and, in the first half of the fiscal year, the government borrowed £40.3bn, an increase of £7.2bn, or 22%, on the corresponding period a year earlier. Not for five years has April-September borrowing shown a rise.
The danger is of more of this to come. George Buckley, an economist with Nomura, the Japanese investment bank, warned of a “perfect storm” for the budget deficit. “The chancellor has already announced a significant increase in spending, more loosening could come in the budget – and on top of that the ONS (Office for National Statistics) has changed the way it accounts for student loans,” he wrote last week. “All of these may conspire to raise the 2020-21 deficit substantially from the spring statement forecast of around 1% of GDP, possibly creeping towards 3% of GDP.”
The chancellor had an answer to this, which was that his priority in the budget would be infrastructure spending, which generates long-term gains for the economy, rather than tax cuts to offer a short-term political boost.
Javid’s commitment to more infrastructure spending is genuine and longstanding, and his frustration on being able to deliver on it must be considerable. He sees the combination of very low borrowing costs for government and the need to add to and renew transport, social housing, hospitals and schools in Britain as a no-brainer. When he was in the leadership contest he talked of an additional £100bn over five years. He has talked more recently of an “Infrastructure revolution”
There was also, emerging in Treasury thinking, a way to do this, while remaining true to fiscal rules, and respecting the need to control the budget deficit. The thoughtful and somewhat complex way of doing this, highlighted by Richard Hughes and his colleagues at the Resolution Foundation, will be discussed at an event this week. This one, at least, has not been cancelled.
This approach, that the fiscal rules should target the public sector’s balance sheet, by focusing on its net financial liabilities or the intergenerational balance sheet, which would include the present value of future tax and spending commitments, has a lot to be said for it. Most relevant to a government intending to spend more on infrastructure would be to target public sector net worth; all financial and non-financial assets and liabilities pf the government. This would show the virtue of borrowing to invest.
The main drawback was that a net worth target, while sensible, might be difficult to implement immediatelly, partly because of data shortcomings. Scrapping the fiscal rules would be risky, economically and politically.
More straightforwardly, for a government that had not had too much time to think about these things, Ruth Gregory of Capital Economics suggested that the government could simply focus on balancing the current budget, excluding investment, alongside a secondary commitment to reducing debt relative to GDP.
The current budget was in small surplus last year, 2018-19. Such an approach, she suggests, could allow an immediate infrastructure boost of £32bn, or 1.5% of GDP.
All this was ready to roll, and one would hope that the effort has not been wasted. Brexit has cast its deadly spell again.