Jeremy Hunt’s first budget prioritised increasing economic growth, and his various announcements on childcare, pensions and disability benefits are expected to modestly achieve that aim. However, while he was careful to stick to his fiscal rules, his willingness to spend more in pursuit of growth led him to make more promises—to parents, high income pension savers and motorists, among others—that will make funding public services sustainably even more difficult in the coming years.
It was understandable and welcome that the chancellor focused on increasing labour force participation in his budget, which has been heading in the wrong direction since the pandemic as poor population health and early retirements have reduced the pool of available workers. It is an important driver of growth, and the measures Hunt announced will have a positive impact, according to the Office for Budget Responsibility (OBR), his independent forecaster. On those terms, then, the chancellor could call his budget a success.
But the economy is forecast to grow by only 0.2 per cent by 2028, hardly a radical improvement, and that extra growth does not come cheap. The expansion of free childcare, more generous pension allowances and programmes for those on disability benefits are expected to raise participation by 110,000, at a total cost of £7 billion per year. That means the chancellor spent £65,000 per extra job. Add in more generous allowances for business investment (which are only temporary, although the chancellor has said he wants to be permanent) and this is a budget where modestly higher growth was pursued at considerable cost to the exchequer.
Of course, these measures—and especially expanding childcare—are about more than just increasing participation. Expanding that entitlement represents an important expansion of the state’s offer to parents and provision of childcare is now a near-universal benefit. But that largesse comes at a time when the state is struggling to afford its existing commitments. Public services were a notable omission from the chancellor’s speech. The Institute for Government and the Chartered Institute of Public Finance and Accountancy’s Performance Tracker highlights the dire state of the NHS, courts, adult social care and other services. The plans Hunt laid out yesterday implied relatively small increases over the next two years, followed by even tighter budgets beyond the next election. Progress that seems to have been made in the past few days on reaching pay deals to end strikes is welcome, but will put even more strain on departments’ budgets unless the Treasury finds more money to pay for them.
While the tax burden continues to creep up overall, it has been apparent for some time that additional demands on public services from an ageing population will require more national income to be devoted to those services or the offer to the public scaled back. Instead, this budget scaled the offer up in the form of new childcare commitments. At the same time, Hunt aspires to cut taxes further: he wants to make the £9 billion per year capital allowance commitment permanent and it is almost inevitable that future planned increases in fuel duty will also be canned. As a result, the medium-term position looks increasingly unsustainable.
Hunt’s budget suggested that he was happy to kick the can down the road. Most of the contradictions in his fiscal plans will emerge beyond the next election when “pencilled in” spending plans need to be turned into the reality of firm departmental budgets. This creates awkward questions for both the main political parties heading into the next election. But pretending that we can expand what the state does and provide good quality public services without tax rises is a disservice to the public.
