There is no budget next week. Instead, the chancellor will present the first spring statement. The theory is that this will be a very different beast from the traditional budget. And all the indications are that this one will, indeed, be different. Unless they are keeping their cards remarkably close to their chest, there appears to be none of the usual frantic pre-budget working up of policy options going on at the Treasury. We might actually get a chancellor resisting the temptation to faff and fiddle only a few months after his last bout of faffing and fiddling.
That is to be applauded. Until now, Britain has been pretty much unique in having two big fiscal events each year, and the continual change this has brought has not served us well.
If he carries through with his intention to do very little, there no doubt will be some criticising Philip Hammond for not doing enough. They should be ignored for now. The time for making big changes to tax and spending policy is in the budget. This is not the budget. Save the criticism for the appropriate moment.
So what will this much-reduced statement bring? Well, for one thing, we will get the Office for Budget Responsibility’s newest set of forecasts for the economy and for the public finances. There might actually be some glimmers of better news here. The most recent public finance and productivity numbers have been a little better than expected, back in November. Whether a couple of better productivity numbers will be enough to lead the OBR to reverse its gloomy prognostications from the autumn about the future path of growth is doubtful. It might, though, upgrade its fiscal projections just a tad in the face of stronger tax receipts.
Don’t be taken in by any spin or triumphalism suggesting that this is all good news. One thing is guaranteed. The numbers will still look dreadful compared with the forecasts made only two years ago.
So we will see some new public finance numbers — but the chancellor has also set out a more intriguing purpose to the spring statement. He has said that it will “consider longer-term fiscal challenges and start consultations on how they can be addressed”. Now that’s the sort of promise that can get fiscal nerds like me excited. Sad, I know, but there it is.
This is where lack of action will disappoint. We are, after all, not short of long-term fiscal challenges. Some are already under review. We are expecting a green paper on paying for social care in the summer. This isn’t just a fiscal challenge, it’s a social priority.
We also have had a review already of the way in which the tax system favours the self-employed and incorporated businesses over hard-done-by employees. The increasing number of billions of pounds that this is costing the Treasury is a serious fiscal problem. At some point it will require more than the rather feeble sticking plaster solutions that this weakened government has been able to provide.
There are plenty more challenges. Here are three that might be top of my worry list and which really could do with some serious long-term work.
First there’s fuel duties. These have not kept pace with inflation for the past eight years, costing the exchequer £6 billion a year. In the longer run, as petrol and diesel vehicles become more fuel-efficient and eventually are phased out, we will need to decide how to deal with around £30 billion a year in tax revenue drying up. That is a very big hole to fill. It’s also just the sort of fiscal challenge that has politicians reaching for the blindfolds and earplugs — hear no evil, see no evil, speak no evil.
Next there’s the taxation of wealth — housing, pensions, inheritance and the rest. While income growth has been feeble over the past few years, those holding stocks of wealth have seen the value of that wealth continue to rise. Overall wealth has more than doubled as a fraction of national income in recent decades. This has not been matched by anything like an equivalent rise in the amount we raise from wealth taxes.
Given how badly designed the present set of taxes is, that might not be such a bad thing, but concerns over economic efficiency, intergenerational equity and social mobility all point in the same direction: we need to take a fundamental look at the way we tax both accumulated capital and transfers of wealth. The economic and political difficulties are obvious, and getting any sort of consensus will be tough. That is no excuse for ignoring the issue.
Then there’s the biggie: the fiscal challenges created by the increased costs of health and of an ageing population. Unless we want to see a complete change to the way we pay pensions and provide healthcare, there is just no escaping the need to spend, at an absolute minimum, another 3 per cent or so of national income on pensions, health and social care over the next two or three decades.
That’s an extra £60 billion in today’s terms. Over the past 70 years, increased spending on health and pensions has largely been paid for by lower spending on defence, and to some extent on housing and on supporting industry. It’s hard to see what else can now be cut on this scale. Which means more tax.
So Mr Hammond’s pledge to use the spring statement to consult on long-term fiscal challenges could be braver than it sounds. Next Tuesday he should be judged on whether he opens these sorts of conversations. He should not be criticised for sticking to his guns and avoiding major short-term fiscal announcements.
This article was first published by The Times and is reproduced here in full with permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist