Boris’s budget tests limits to destruction

Gosh, politics is a rum game.  Britain’s PM, Boris Johnson, took some big risks and triumphantly shattered Britain’s political status quo during the Brexit turmoil.  But last week’s budget statement set the country’s economic parameters in anything but a Thatcherite way.

The difficulty is less in the government’s post-Covid financial tidying up, and more in its approach to long-term problems.  And these look like they might become more urgent – and sooner.

Conservative commentators have lead the criticism:

“ … state spending as a share of GDP will reach its highest sustained level since before Margaret Thatcher came to power in the late 1970s.

And to pay for all that, while borrowing will rise, the overall tax burden, says the independent Office of Budget Responsibility, will be higher than at any time since Clement Attlee’s post-War Labour government in the late 1940s.”

That might be manageable if it represents a post-Covid road bump.  But the detail of the budget suggests it might not.

First, much of the spending is structural.  As the Daily Telegraph’s Liam Halligan points out, health spending is projected to increase from 2008’s 6.5% of GDP to 8.4% in 2024 (it was 3.9% in 1978). And the government’s commitment to generous support for elder care could put this under further strain.

Secondly, interest on the government’s swollen debt is at historically low levels.  A rise in interest rates would quickly transmit to the budget deficit.

Thirdly the government’s green plans are likely to be more expensive than projected, in part because of the wishful thinking usually built into these ventures and partly because of the havoc wreaked by a higher cost of capital on fossil-fuel replacement investment.

Finally, the distortions in the British tax model and the high marginal tax rates, particularly on the most productive classes, might just prove a bit more of a drag on growth than expected.

Things could still go right if British (and global) economic growth rises above its limping trend rate of the last 14 years.  But the messages here are decidedly mixed.  While Boris talks a good game on regulatory reform and private-sector driven growth, the reality so far is a large dollop of government strategic direction and ‘partnership’.

So while Boris’s Chancellor of the Exchequer, Rishi Sunak, boldly claims he is on a “moral” mission to cut taxes and halt the inexorable growth of the state, he has probably already lost the confidence of the Conservative party voter base.

Sunak and Johnson are taking two gambles.  The first – that their core voters have nowhere else to go – looks finely balanced.  The second – that potential British investors have nowhere else to go – looks more risky.

They may have decided to pile on the misery now, with the aim of resetting expectations with a tax cut next year, leading into an early general election in 2023. 

But if they get caught in a high interest rate / low growth trap, last Wednesday’s budget will look like a very costly – and complacent – mistake.  Mr Johnson will likely be dispensing with Mr Sunak’s services.

Meanwhile, other governments will have his example from which to profit. Assuming, of course, that they haven’t been following in his path.

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