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by GK Strategy 16th November, 2017
3 min read

Bean-counting caution or something more optimistic? David Laws unpicks the Chancellor’s challenge and what should be expected ahead of next week’s Budget

After the (forced) resignations of her Defence and International Development Secretaries, Theresa May will be looking forward to the Budget on 22nd November as an opportunity to change the narrative around her beleaguered Government. I am writing this less than a week before the Budget, so you might think that by now all the major decisions will have been “locked down”. Think again – during the Coalition Government, I took part in the planning and negotiation of numerous Budgets, Autumn Statements and Spending Reviews and often the biggest decisions were taken within hours of going to the printers. Little of this will have changed.

For the Chancellor and Prime Minister, there are two key decision points around Budgets. The first arrives when the economic forecasts are received from the independent Office of Budget Responsibility (OBR), established by the Coalition Government. Gone are the days that Chancellors could fiddle the economic forecasts to suit their political needs. These forecasts then shape the Budget debates, because they determine how much money the Chancellor has to “giveaway” or needs to raise to meet borrowing targets.

Nobody outside the Treasury and Number 10 yet knows what the OBR is forecasting, but the news will be mixed at best and is likely to be bad. In the year ahead, the Government’s deficit – the gap between spending and taxes – may be slightly smaller than expected. However, the OBR seems likely to revise down its longer-term projections for productivity, and therefore economic growth. Even seemingly small revisions to these forecasts can massively alter the size of our economy in 5 and 10 years’ time – adding tens of billions to borrowing projections. The fear is that the Government’s hopes of reaching budget balance will yet again slide backwards in time – meaning a prolonged period of further austerity.

Philip Hammond, a cautious man by instinct, won’t like to project extra years of borrowing. Ideally, he would like the public finances to be in a stronger state to weather the uncertainties of Brexit, but he is likely to have little choice other than to project more red ink. Raising taxes is a tough call with little or no parliamentary majority and cutting spending is equally testing, with pressures to spend more on the NHS, higher education, public sector pay, and possibly even welfare.

If making the best of a miserable set of forecasts is all that can be expected on public borrowing, what else might the Chancellor do? The Government desperately needs to deliver some good news for hard-pressed households facing declining real incomes. Whatever did happen to all that was promised for those “ordinary-working households” or the ”just about managing” families that Theresa May was so keen to give a helping hand to?

If there is any lesson from recent years, it is that a determined Chancellor can always target tax cuts and extra spending on certain groups if he really wants to. Money can always be raised from those Treasury favourites – tax avoidance, and departmental “underspends” – and a determined Chancellor can shift the tax burden between different groups of households. That’s when the other key Budget decision point arrives – agreeing the internally famous “Budget Scorecard”. This is the one, or at most two, page summary of all the key tax and spending announcements to be unveiled in the Budget – from tiny £10m grants made to niche recipients, to billions spent on tax cuts for selected voters or businesses. The Treasury jealously guards access to this summary, which will usually only be shared with the Prime Minister. Meanwhile, the Treasury, Prime Minister and individual departments will feed in their own pet schemes and proposals and the Chancellor will try to make the whole spreadsheet “add up” to the total net desired effect on public borrowing.

What could be on this Budget’s scorecard? The Treasury will probably want growth-enhancing initiatives, such as more infrastructure spending and perhaps some support for skills training. The PM and Health Secretary may want a financial boost for our hard-pressed NHS, not least as public sector pay control has to be gradually relaxed. A truly ambitious Chancellor and PM would dare to take some bold decisions to boost the incomes of those hard-pressed working families. How about making council tax more progressive and slashing the burden on smaller properties? Or why not dramatically raise the starting point at which low paid employees start to pay national insurance if necessary shifting the burden onto higher earners? Theresa May’s problem is that her Chancellor is not by nature a radical, progressive, reformer of the type that – say – a Chancellor Gove might be. His natural instincts are for bean-counting caution. Both the Treasury and PM will know that with higher borrowing projections, most “giveaways” will require someone else to pay – are they willing to push such potentially unpopular decisions (with their own more affluent voters) through Parliament?

In just under a week, we will know the answers to these questions. They will tell us much about the Government’s radicalism, its ambition to manage more than Brexit, and ultimately its ability to thrive and survive over the challenging years to come.

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