2024 will be the year UK fiscal policy became a sad joke

 

The media is full of stories about tax cuts in the Budget, stories encouraged by the Chancellor. Let's put aside the fact that the country really needs better public services rather than tax cuts. Let's also put aside that the economy will be far better off with additional public investment than tax cuts, but Jeremy Hunt is planning to reduce public investment over the next five years. Focus instead on the reality that any tax cuts the Chancellor makes will be a joke on the electorate where only he will be laughing.

To see why, it's useful to start with a similar joke it has been playing for a decade involving fuel duty. The government pretends that it will, in future years, uprate fuel duty in line with inflation plus a bit more. This increases OBR forecasts for future tax revenue, giving the Chancellor what the media calls extra ‘headroom’ to cut taxes. Then when each budget comes along the Chancellor announces they are freezing fuel duty, but just for this year.

Now any forecaster, seeing the government play this trick year after year for the past decade, would expect them to carry on doing it. But, to quote the OBR: “Parliament has stipulated that our forecasts be based on the Government’s stated policies and that we must not consider alternatives.” So the OBR is stuck making unrealistic forecasts.

It’s obvious why this trick is an easy win for the Chancellor. He gets to do the ‘protecting the motorist’ spiel in every budget by presenting the duty freeze as a ‘tax cut’, but gets to make any tax cuts look more affordable in the longer term than they actually are by pretending he will, despite his actions over the last decade, increase fuel duty in the future. The problem is that, when it comes to government policy, the OBR have to take the numbers the government gives them rather than do a forecast of their own based on the government's past behaviour.

Unfortunately Jeremy Hunt has found a new way to exploit this flaw in the way our budgets are done as we head towards the election, and its magnitude and importance is much greater. The Chancellor desperately wants to cut taxes, but does not want to break his fiscal rules in doing so. These fiscal rules, for whatever their flaws, are designed to stop Chancellors doing pre-election tax cuts (or spending increases) that they then reverse after the election because they were never going to be sustainable.

Hunt can get round this constraint because the OBR is forced to use the Chancellor’s numbers for future public spending in its forecast. All Hunt needs to do to ‘afford’ to cut taxes is give the OBR unrealistically low numbers for public spending after the election, and the OBR forecast will show he has room for tax cuts while still meeting his fiscal rules. Which is exactly what he did in 2023 [see link in postscript below].

It’s a joke he can keep on telling. With each new fiscal event (Budget or Autumn Statement), if the OBR’s forecast shows he doesn’t have enough room for another tax cut, he can just reduce the assumptions for future public spending until it does. Of course this makes a mockery of the UK’s budget process, the independence of the OBR and the government’s fiscal rules, but for this Conservative Chancellor and his predecessors politics and being in power wins out over all that. If you believed these Chancellor’s claims about being fiscally responsible then I’m afraid the joke is on you.

You might have thought that making unrealistic assumptions about future public spending should cause the Chancellor some political grief. They don’t, because the numbers for spending in four or five years time are just aggregates, and are not split down by department. The government can avoid difficult headlines by saying they will ‘protect’ spending on things like health, whatever these totals are. Fiscal experts, like the IFS, will do their best to calculate the implications for individual departments, but by then the headlines have been written.

Everyone who knows anything about UK budgets knows what is going on. Chris Giles was being very charitable recently when he said that the next budget will show us whether the Chancellor thinks he can win the election. The idea is that if he thinks he could win, it will be him who has to raise taxes after the election so he will be restrained in playing the tax cut trick now. If he thinks the election is lost, then he will have no problem playing this trick because it will be Labour that has to raise taxes after the election. Chris is being charitable because in reality Hunt will play this trick as far as he can whatever he thinks his chances are of winning the election, because as I said earlier for recent Conservative Chancellors power and short term politics trumps everything else.

In an earlier post I talked about how to mend this flaw in the UK budgetary process by giving the OBR more discretion. But that is not going to happen before the election for obvious reasons. As a result, fiscal policy in the UK will become a sad joke (or for those who already think it always is a joke, an even sadder one.). It’s a joke that those in the know will understand, but most voters will not. It will be yet another example of where the media is unable or unwilling to tell people the truth (because the truth might be 'controversial'), and instead actively misleads the public.

We can see something similar happening with the charade about the government trafficking some of those seeking asylum in the UK to Rwanda. The Rwanda scheme is a cruel joke. Cruel if anyone is eventually forced on to a plane to Rwanda. But a joke because the numbers planned are tiny compared to the total numbers claiming asylum in the UK, and for this reason alone the scheme will not act as a deterrent. If you think that I’m exaggerating the absurdity and pointlessness of the Rwanda scheme, read this by Ian Dunt.

As a result, journalists should be laughing in Conservative ministers’ faces when they talk about the importance of the Rwanda scheme, and repeatedly ask them why they are spending so much of their time and our money on this nonsense. Unfortunately most of the time this doesn’t happen. The result is that voters get seriously misled. About half of voters believe that more people seek asylum after crossing the Channel (‘illegals’) each year than migrants who receive visas (‘legals’), when the opposite is true by a mile. Because most viewers will not find this out from the newspapers they read, broadcasters need to make telling people part of their duty to inform and explain. Most of the time they just don’t.

So when the budget comes around, journalists will go through the same routines as they do for every budget, examining the fiscal projection numbers in great detail, even though those numbers are based on assumptions that are pure fiction. They will talk about the Chancellor meeting his fiscal rule, even though with any sensible assumptions about future public spending he wouldn’t. Political journalists will obsess over whether Labour will reverse Hunt’s tax cuts, even though Hunt will have to reverse his own cuts. In other words journalists, by treating these numbers as they would any normal budget, will be making sure the trick the Chancellor is playing will work.

This in turn tightly constrains what the Labour opposition can do. When it looks like a normal budget to voters, and is treated as a normal budget by the media, Labour calling it what it is - a sham - will probably be seen as far too high an electoral risk. Yet if they don’t say why the Chancellor’s tax cuts are built on sand, and will have to be reversed, they not only further legitimise the process, but they make life more difficult for themselves in government. If the media was more honest, so could the Labour opposition.

The best we can hope for is that anyone who gets a chance makes it clear that any tax cuts this year will be reversed after the election whoever wins. In addition, any government that wants to improve the dreadful state of our public services will need not only to reverse this year’s tax cuts but in addition to raise taxes further. But if this happens it will be the exception rather than the rule in both Budget and election commentary. Instead most participants will continue to pretend not only can you get better public services without additional tax revenue. They will pretend that any tax cuts made this year, or promised for the future, will be permanent rather than the temporary election gimmick that they actually are. 

Postscript (24/01/24) Here is the head of the OBR describing the public spending numbers he has to work with.