Ten Takeaways from Budget 2018

While the Treasury was forced to embrace the Prime Minister’s narrative of the end of austerity, many of the real decisions have been delayed to next year and the hoped completion of the Brexit negotiations. The Treasury continues to push a narrative around boasting productivity through enterprise and new technologies like AI or blockchain — somewhat in tension with the introduction of what it clearly hopes will a politically popular Digital Services Tax on big tech.

  1. Austerity has been eased in the short term…

Much of the run-up to this Budget was dominated by the Prime Minister’s announcement of an ‘end to austerity’ — and what this would mean in practice. The Budget itself gave limited answers to this question. On perhaps the original meaning of austerity — eliminating the deficit — this Budget confirmed that the Treasury has largely lost interest. While the OBR’s documents point out that the Government could have balanced the books if it banked the recent windfall improvement in the public finances, the Treasury instead chose to spend it all and maintain a deficit of 1% of GDP for the foreseeable future.

Other commitments do signal more a change in direction. The Government threw more money at Universal Credit — although the OBR’s pointed complaints about lack of notice suggest that part of this may have been a last minute addition. Similarly, the Budget documents confirm that the Public Sector Pay cap is over.

2… but the crowding out created by health spending gives a preview of the longer term dilemma facing the public finances.

On the other hand, many of the other discussions on long term public forecasts have been punted to after the completion of the Brexit negotiations and next year’s Spending Review.

As the OBR points out, once the extra money for the NHS is stripped away, other departmental spending is largely flat — although the Treasury insists that these numbers are only indicative and they could be upgraded after a ‘deal dividend.’ Given the current level of uncertainty, this delay is probably sensible: one reason that we are having this Budget so early, after all, is to get it out of the way before the Brexit negotiations. The Treasury would likely have not chosen the ‘end of austerity’ framing itself, if not bounced into by the Prime Minister.

This gives a preview of the potential dynamics of the 2020s. One reason many commentators were so wary of the idea of the ‘end of austerity’ is of the increasingly imminent rise in health and pension costs that most forecasts pencil in for the 2020s. Given the public’s attachment to the NHS and the service’s only challenge in sticking to its own spending targets, it is likely to continue to soak up spare resources for years, if not decades to come. The inevitable result is going to be austerity elsewhere: either with constrained public spending in other departments, or through persistent and continued increases in the tax burden.

3. The narrative around the Digital Services Tax suggested that the Government believes attacking big tech is a PR win.

It was telling that the Treasury’s comms largely chose to position the new Digital Services Tax as a good news story, rather than a regrettable necessity — tech companies have joined banks or pollution as something which the Government feels taxing is a win it itself. Certainly, given the scale of the other spending or fiscal changes elsewhere, the Treasury was under no significant fiscal pressure to rush to raise another £400 mn with a unilateral new tax — imposed at a time when the UK is desperately trying to maintain its reputation as a European hub and attractive destination for investment. While the Government is keen to position this as a moderate, pragmatic move, in the US it is far more likely to be seen as a protectionist new tariff. Given the unpredictability of the current administration and the strong desire for a UK-US trade deal, this is at best, risky.

4. Seeking to draw a divide with Labour, the Government’s rhetoric highlighted the benefits of enterprise, innovation and free trade — but the actual policies were significantly more big state.

While the Digital Services Tax will take much of the attention, it is far from the only measure with a distinctly statist flavour. The eye catching new ambition to reform the Low Pay Commission’s remit to ‘eliminate low pay’ — officially defined, very arbitrarily, as two thirds of median earnings — threatens to raise the National Living Wage to levels in the OBR’s words “with few international precedents”. The ending of PFI was largely recognising the reality that the market has largely dried up anyway — but rhetorically played into Labour arguments. The Government’s Industrial Strategy continues to largely involve announcing new pots of money for favoured technologies — in this edition, quantum computing and nuclear fusion — with little action on broader supply side reform. Combined with previous announcements like the energy price cap and reforms to corporate government, the current administration retains its often Milibandite ethos.

5. That said, elements within the Government do appear to be fighting back to support a more traditionally free enterprise programme.

Rumours suggest that the bringing forward of the raising of Income Tax thresholds was strongly pushed by Liz Truss, not wishing to see the end of austerity entirely defined in spending terms. Despite being seemingly set up to to justify further action on housebuilding ‘landbanking’, the Letwin review largely clears the construction industry, suggesting that slow market absorption of overly homogenous houses is the main reason for slow build outs. An intriguing consultation on boosting innovation in regulated utilities suggest the Government is not — yet — planning on creating its own nationalisation drive.

6. Given the understandable focus on Brexit, it is easy to miss that much of the rest of the May / Hammond domestic policy agenda — now over two years old — is starting to move from announcement to concrete detail.

After a year of being high in the media agenda, the formal announcement of a new single-use plastics tax on all packaging that doesn’t include at least 30% recycled content was rather overshadowed today — but like the Digital Service Tax, represents the UK moving ahead of other governments. Flagship funds such as the National Productivity Investment or Transforming cites were rolled forward an extra year, providing new funding for long standing priorities in road, fibre, and other infrastructure. Dating back from the Coalition, but adopted by May’s Industrial Strategy, both the Northern Powerhouse and Midlands Engine are to receive updated strategies early next year.

7. The Government continues to be obsessed with AI — seeing as its best long term bet to boost innovation and productivity.

The Centre for Data Ethics and Innovation is given a more explicit remit to study “the use of data in shaping people’s online experiences and the potential for bias in decisions making algorithms” and the Budget confirms £50 mn for Turing AI Fellowships to attract global research talent. At the same time, the Office for AI and Government Digital Service are to review how AI can boost public sector efficiency. (While I agree this is important — writing a paper for Policy Exchange on it earlier this year — it is slightly telling that this is the only mention of public sector productivity within the Budget, suggesting the Coalition focus on efficiency improvement is, at best, de-emphasised.)

8. The Government still believes in blockchain.

On top of AI, the Budget also has a new focus on other forms of digital innovation, including a series of ‘Distributed Ledger Technology Field Labs’ run by the Digital Catapult and new regulations on cryptoassets and digital currencies. While it has become fashionable in recent years to mock the supposed overhype of blockchain, the Government is clearly still taking it seriously.

9. This was a Budget over stuffed with micro policy announcements — but other agendas such as social care or modern labour practices were noticeably missing.

What was also notable was what did not make the budget. The Government continues to procrastinate on publishing its Social Care Green Paper, and wading back into controversial technology. There was little in the Budget on modern labour market conditions, how to achieve the Industrial Strategy’s ambitious R&D target or the Government’s Good Work agenda — with much of the Taylor Review remaining unimplemented. And then of course there was the ultimate dog that did not bark: Brexit.

10. This was largely a Budget to mark time.

This could have been a Budget that reinforced the UK’s negotiating position, or put more detail on how the Government would react in a Hard Brexit scenario. Instead, that, like so much else in British politics, details of either the emergency plan, the Chancellor’s promised ‘deal dividend’ or the ultimate spending envelope for next year’s Spending Review have been delayed until the negotiations are more locked down. Policy hyperactivity on smaller measures was used to duck the choices on the bigger decisions.

In his first Autumn Statement, Hammond made a big deal of moving to a single Autumn Budget with the Spring Statement a mere forecasting exercise. Somewhat ironically, two years later, he has been forced to have a Budget where too many unknowns remain up in the air — with the real decisions delayed once more to the spring.