by Darwin Friend, Researcher at the TaxPayers' Alliance
At the last Budget in October 2018, the then chancellor Philip Hammond triumphantly declared that austerity was over. With the deficit cut, it was job done and he suggested that now was the time to turn the taps on and increase public spending. Last week’s public sector finance figures emphasised this strategy continues, revealing that borrowing, debt and tax receipts were on the rise. However, with the 2020 Budget drawing closer, it would not be wise for Rishi Sunak and Stephen Barclay to continue this abandonment of fiscal conservatism.
One of the hallmarks of all Conservative governments from Margaret Thatcher to David Cameron has been sound management of the economy. Whether this is Lawson’s tax cuts designed to stimulate the economy, or Osborne’s long term economic plan to lower public spending and deal with the deficit, it is clear that being fiscally conservative and electorally popular come hand in hand.
So how does the current administration measure up? Borrowing is currently at £44.8 billion in this financial year (April 2019-January 2020), an almost 15 per cent increase from the same time last year, going against the trend of borrowing generally falling since 2009-10.
While January 2020 does show a surplus of £9.8 billion it is important to remember that this is not unusual, as self-assessed income tax is paid. This surplus is also £2.1 billion less than in January 2019. Together these poor borrowing figures give cause for concern that the chancellor will not follow his Conservative predecessors in economic prudence, but instead offer more and more spending pledges, requiring more borrowing.
Instead of borrowing extra cash the government should use the money it already has more efficiently. Simply put, it needs to cut wasteful spending. Reports suggest this something both Sunak and Sajid Javid before him have cottoned on to. A host of government projects have seen costs spiral, with Crossrail alone almost £2 billion over budget. Meanwhile the estimated costs for HS2 have risen from £56 billion in 2015 to £106 billion now. If the chancellor wants to find more cash for the ‘people’s priorities’ then he should look here for savings first, before abusing the government’s credit card.
With more borrowing comes yet more debt, which currently stands at £1,798 billion or 79.6 per cent of GDP, an increase of more than £41 billion on January 2019. Such levels of national debt diverts taxpayer cash away from their priorities to pay for the interest on government bonds. The Office for Budget Responsibility calculated this public sector debt interest in 2019-20 to total £40.2 billion, more than the budget of the Ministry of Defence.
While having a national debt is common for governments and has limited immediate consequences, eventually it catches up with them. Countries who fail to control rising levels of debt, like a football team in the relegation zone, are no longer in control of their own fate and become susceptible to fluctuations in the business cycle as was seen in 2007 financial crash. This means that when the economy is at the trough of a business cycle that borrowing costs will rise. If the government thinks the public were irritated by more NHS spending that didn’t actually see visible new hospitals built, imagine how irritated they’ll be when the spending is just paying off invisible interest payments.
It also affects economic growth and investment. A government which decides to borrow can affect the capital markets, as investors would rather loan money to governments than the private sector because of the UK government’s nominal risk of default. A lack of investment into the private sector then sees growth slow and adversely affects the employment market. This is the unseen side of borrowing which has a real world impact on left behind towns.
Perhaps, instead of burdening further generations with a record level of debt, the chancellor will decide that now is the time to tackle this problem by not adding further to current borrowing levels. In doing, so investment can be directed toward private enterprises, which will foster economic growth and create more jobs across the UK.
As well as debt and borrowing rising, the Office for National Statistics show government receipts grew by 3.4 per cent compared with January 2019 to £82.8 billion. Much of this came from taxes on businesses, with self-assessed income tax and capital gain tax receipts totalling £22.7 billion – the highest amount gathered in January on record.
During the general election campaign the prime minister decided to focus tax cuts on “people who need them most”. While the proposed changes to increase the threshold for national insurance contributions to £9,500 next year is welcome news, the tax receipts mean more can be done. Our proposals to move the national insurance allowance in one big hit could be a boon for minimum wage and seasonal workers alike.
With five million Britons self-employed and rising – as well as the tax burden already at a 50 year high – it is obvious that taxes cannot keep going up forever, especially when many hard-working taxpayers are fighting for every penny. The answer to this isn’t to spend away the problem, because if spending was lower, taxes would also be lower - allowing more taxpayers’ to keep more of their own money. Doing this strategically would be far more preferable, both for the fiscal prudence and the long term health of the economy itself.
When the chancellor stands up on March 11th to deliver the Budget, he needs to remember that every pound he offers in additional spending is paid for by someone, and he must ask himself whether taxpayers’ can spend their own money better than he can. The best way to deliver the peoples priorities may be to let taxpayers’ keep their own money and spend it as they wish.