Ian McConnell: Budget 2021 : Can Rishi Sunak ignore inbuilt Tory instinct and avoid past errors?

Mr Sunak has, since last spring, seemed keen to portray himself as a man of the people, as he has unveiled support measures including the crucial coronavirus job retention scheme and ensured a great fanfare over his Eat Out to Help Out scheme.

However, as we have seen from a Conservative administration which has put ideology to the fore with its damaging Brexit, there is a difference between superficial appearances of being at pains to help the people and the underlying reality.

It remains to be seen exactly what Mr Sunak comes up with in his Budget today.

One interesting aside from all of this is that he does not mention the damage the Tories had already done to the public finances, before the onset of the pandemic. He should take a look at this because it provides lessons for the future.

Firstly, the austerity programme which began in 2010 under a Conservative-Liberal Democrat coalition when the Tories were led by David Cameron and George Osborne was chancellor, the effects of which are embedded, proved dramatically counter-productive. Money was taken from those with the least through savage cuts to welfare, from people who have to spend all of their money to live, thus subtracting directly from aggregate demand. This is basic arithmetic.

And the Brexit odyssey has of course dragged for years on growth, amid intense uncertainty. With Prime Minister Boris Johnson ultimately choosing a hard Brexit, it turns out everyone was right to be very worried, and we have seen much chaos already. The hard Brexit will bear down on growth in years and decades ahead, thus weighing heavily on under-pressure public finances.

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UK public sector net debt has risen to more than £2 trillion for the first time in history amid the pandemic. And Mr Sunak, who really must focus on providing the support businesses and households need until the vaccines enable a return to something like normality, seems worryingly distracted by his feeling that he should “level” with people on the public finances.

What he is not shouting about is that the Conservatives, before the coronavirus pandemic hit, propelled the UK’s public sector net debt from £1 trillion in 2010 to £1.8 trillion.

The pandemic has undoubtedly hammered the public finances.

However, the Tories ignore at their peril the need to secure a strong recovery, which will actually be crucial for the medium and long-term good of the public finances.

Simple arithmetic often seems to elude this current Conservative administration, as is evident in its excitement in pursuing a US trade deal with very small economic benefits (which has not yet materialised) and celebration of a hard Brexit which has brought huge damage.

And short-termism seems to be playing a major part in Mr Sunak’s messaging about the public finances.

This short-termism, in spite of all Mr Sunak’s talk about going big and early and giving everyone all they have needed, was evident in the Chancellor’s persistent refusal to extend the coronavirus job retention, or furlough, scheme through last summer and autumn. He was eventually forced to do so, in an excruciatingly protracted U-turn. This persistent intransigence appeared to be rooted in Tory instinct and ideology.

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Whatever it was, it looks to have cost many, many jobs, with employers having had a woeful lack of visibility on support ahead of a previous October 31 deadline for the end of the furlough scheme. Mr Sunak for so long remained determined to stick with this deadline until circumstances forced his hand. The circumstances which arose should have been evident to him for months – yet he did not have any kind of adequate plans in place. The detrimental impact on unemployment from asking employers (some of them with no revenues given lockdown or much-reduced activity) to make significant and growing contributions to the furlough scheme through last summer and autumn should also not be underestimated.

Mr Sunak, in the face of reality, eventually had to reduce the level of contribution demanded, and increase UK taxpayer support provided, but not before much damage had been done. And employers are still having to cover pension and national insurance contributions for furloughed staff.

Rishi Sunak in Rothesay Picture: Jeff J Mitchell/PA

The Chancellor’s seeming impatience to risk recovery with a premature, short-term focus on the public finances also looks like Tory instinct.

There seems thankfully to be some kind of belated widespread realisation that the Tories’ savage austerity was foolish and counter-productive, almost a consensus. The stupidity of this path was evident before the Conservatives embarked on it in 2010, so it is a great pity the UK’s leaders could not see this, made the huge mistakes and left us all with the consequences.

The apparent, new-found, near-consensus might constrain Mr Sunak to a degree, in terms of the mix of what he does, but the devil will be in the detail, not the polished presentation. And we should be wary.

It remains, in general, much too early for big tax-raising measures.

The most palatable of the options on this front swirling in the soup of pre-Budget rumours, from an economic perspective, would be a mooted increase in the main corporation tax rate. There is talk of a gradual rise from 19% to 23%.

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This might sound like a big increase but the UK corporation tax rate would still, at 23%, be very competitive in the context of the Group of Seven leading industrialised nations.

And we must not forget, even as the general population and the poorest in particular footed the bill for the global financial crisis after the Tories came to power in 2010, corporation tax was cut very sharply from 28% all the way to 19%.

So, even if the Conservatives do eventually take it back up to 23%, it will still be way below where it was.

Another point is worth making here. As ordinary people paid for a financial crisis for which they were blameless, the cut in corporation tax was meant to propel business investment higher from 2010.

Remember Mr Osborne’s talk in his March 2011 Budget of “a Britain carried aloft by the march of the makers”. The makers did not march. Business investment did not surge (and this was even before it was hampered by the Brexit folly).

There is talk of any rise in corporation tax being accompanied by investment incentives, and possibly relief for smaller firms. Investment is crucial, although the UK will also have to deal with the consequences of losing capital expenditure which might have occurred had it not been for Brexit. And the drag from lost inward investment, as well as the impacts of businesses moving operations to continuing European Union member states and abandoned projects.

All things considered, a rise in corporation tax would hardly be the end of the world, especially if accompanied by investment incentives and reliefs for smaller companies.

After all, the dramatic cuts in corporation tax have not appeared to do anything much at all to boost the UK economy.

There are, however, some very worrying straws in the wind when it comes to what else might be coming from the Conservatives, in this Budget and subsequently.

There has been talk of freezing the income tax personal allowance at £12,500 for at least three years. There have also been rumours of simultaneously freezing the higher-rate threshold at £50,000 (this does not apply in Scotland, where this figure is due to be £43,662 in the 2021/22 tax year).

Freezing something might not sound too bad, given the drama of the pandemic, and you could envisage a chancellor brushing over the matter in this way.

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However, we saw the dramatic impact of public sector pay freezes when the Tories came to power in the wake of the financial crisis. And, while inflation might be low right now, freezes become much more painful for people when it is even just a bit higher.

A freeze is a real-terms cut, in any situation where there is inflation rather than deflation. And we must not underestimate the major compound effect over several years of such a freeze. We should remember the effect of freezes in public sector pay, then below-inflation pay rise caps, in the years from 2010.

The higher-rate income tax threshold freeze at £50,000 for all parts of the UK outside Scotland would, other things being equal, see more people brought into this band. Such a freeze is an understandable matter for debate, albeit in the context of whether now is the time to be looking at fiscal tightening in a general sense when recovery is not secured.

One point worth making here is that holding back the upper-rate threshold tends to be presented as hitting high earners. In reality, it is people broadly in the middle who are affected by this threshold, even more so in Scotland given it is much lower north of the Border but also to a large extent elsewhere in the UK. That is not to say this threshold should always rise. And the sharp increase in the threshold for people in all parts of the UK other than Scotland in recent times is an important point of context. However, we should be aware that the real high earners are well above the threshold, and affected much less by it than those on middle incomes.

What is beyond doubt is that a three-year freeze in the personal allowance would have a dramatic effect on those least able to afford it. And it would take money away from those most likely to spend it, thus dragging on the overall economy. In the context of rumoured Budget measures, such a move would seem to be at the opposite end of the spectrum to the proposed rise in corporation tax in terms of the scale of potential damage to the economy.

The personal allowance has risen significantly in recent times but that is a good thing, and it is important, for society and the economy, that the positive effects of this are not eroded through short-term thinking.

Boris Johnson and Rishi Sunak Picture: PA

It is always difficult to know exactly what will come in a Budget. In the run-up to such events, you tend to see a mixture of actual policy measures and kite-flying, and some management of expectations.

One thing is for sure though. The Conservatives must learn the lessons of their grave mistakes from 2010 onwards – savage welfare cuts and bearing down on public spending more generally are not the way out of a crisis. Quite the opposite. And making the poorest pay, as well as being entirely unacceptable from a societal viewpoint, is totally counter-productive from an economic perspective.

The road back to better times will require great patience, and a parking of conventional Tory ideology. We will get some sense today of whether Mr Sunak is up to this task, or not.