WWhen Clement Attlee asked his cabinet about the timing of the 1950 election, the then chancellor, Sir Stafford Cripps, was adamant. The Labor government had to visit the country before the budget so voters would not think the decisions being made had been made in preparation for polling day.
Those were the times. As Budget 2024 approaches on Wednesday, the assumption is that Jeremy Hunt will do all he can to deliver a package of tax cuts that appeals to everyone.
The chancellor did everything possible to dispel those expectations, telling the BBC with Laura Kuenssberg on Sunday that he was preparing for a careful, responsible and no-nonsense affair. Taxes should be cut, he argued, but only when they are affordable.
Despite this, the Treasury has explored every avenue to try to find a way to put more money in the pockets of consumers while sticking to its self-imposed rule of reducing debt as share of national income within five years.
Experience suggests that this strategy will not work. To begin with, the amounts involved will be relatively modest. The size of Hunt’s net gift on Wednesday is expected to be a maximum of £10 billion, which is small beer in the context of a £2.5 billion-a-year economy. The package will be smaller than last fall’s statement, which had no impact on the Conservative Party’s disastrous opinion poll results.
Budgets actually matter much less than we think at Westminster. Most are quickly forgotten, and those that stick in the mind tend to do so for the wrong reasons. The most memorable budget event of the current parliament – Kwasi Kwarteng’s tax-cut extravaganza in September 2022 – wasn’t even a real budget.
Gift budgets only work politically if they seem consistent with the direction of the economy. In 1987, for example, Nigel Lawson succeeded in cutting taxes because growth was strong, inflation was low, people’s living standards were improving and public finances were healthy. Lawson cut the basic rate of income tax from 29% to 27%, but he also reduced government borrowing. The deep recession of the early 1980s seemed far in the past, although its scars still linger today. Three months after the budget, Margaret Thatcher won her third election, with a majority of over 100 votes.
Hunt finds himself in a more difficult position. The economy is in recession. Inflation is falling but, at 4%, it remains double the government’s target. National output per capita – a reasonable indicator of living standards – has not increased in the past seven quarters and fell in six of them. The government will borrow more than £100 billion this year to balance its books.
On the plus side, the recession has been much milder than most forecasters predicted a year ago, and it’s probably already over. A good leading indicator is the housing market, where activity and prices have both increased. Inflation fell faster than expected and unemployment remained low. As Hunt told Kuenssberg, the economy has shown some resilience in the face of three major shocks to the current Parliament – the Covid pandemic, the cost of living crisis and the war in Ukraine – and is now on the road to recovery. The coming months should see confirmation of this.
But it is clear that the economy is not in an ideal situation like that of 1987 or anything similar. Even if living standards begin to rise again, it will take some time before voters feel an improvement. If the economy is indeed on track, it may be Rachel Reeves rather than the current chancellor who benefits from the reduction in borrowing that higher growth will bring.
Hunt spent his time at the Treasury seeking to calm things down after Liz Truss spooked markets with her unfunded tax cuts, and rather than increasing demand he focused on measures to stimulate investment and participation in the labor market. In this context, the obsession with using the budget as an instrument for tax reduction seems strange and could prove counterproductive.
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An alternative strategy would be for Hunt to confront his noisy backbenchers and declare that tax cuts are neither truly affordable nor his current priority. If there is money available, he should spend it on fixing broken Britain: cutting NHS waiting lists, fixing potholes, stopping more councils from going bust. Taxes may be at their highest level in seven decades, but that’s not what seems to be bothering the public. On the contrary, they pay much more taxes but get little return.
Hunt believes that the only sustainable way to meet public demands for better public services is to accelerate the rate of growth of the economy. He would therefore be better off ignoring the fact that this is a pre-election budget and instead focusing on measures to improve the supply side of the economy, such as reducing the record number of people out of work due to long-term health problems.
This would be a political risk, but not much of a risk, given that the likely outcome of the Conservative election is defeat, if not a landslide. Voters might respect Hunt more because he sticks to a long-term approach. If things look significantly better in six months than they are today, now would be the time to show a little generosity.
Of course, that won’t happen. Hunt wants to have it both ways. He’ll talk about making long-term decisions while finding money for pre-election tax cuts. It runs the risk of suffering a negative reaction from the markets which would stifle an economic recovery that is still tepid and timid.
