By Prof. Prem Sikka (Professor of Accounting and Finance, University of Sheffield)
The 2018 budget announcement promised much but delivered little. The background is that the UK economy has been dogged by low investment in productive assets and research and development, and low productivity. With Brexit uncertainties these things needed to be addressed as the corporate sector is holding back investment. Wages have been depressed and workers’ share of the GDP now stands at around 49.3%, lowest ever recorded. As a result, people don’t have enough money to spend and city centres have become economic deserts. Personal debt stands at £1.6 trillion.
It is hard to see any concerted economic strategy to address in the Chancellor’s announcement to address economic problems. The centrepiece of the government spend is the much trailed £20.5 billion for the NHS over the next five years. That is most welcome but large part of that will be eaten up the PFI commitments and won’t significantly reduce the queues. As a percentage of GDP, the UK heath spend will still be below that of the Blair/Brown years and behind that of France, Germany and Scandinavian countries. There is no significant additional spend on the police but a spending review is promised. Around £1 billion will be into universal over the next five years. Prime Minister Theresa May promised end of austerity but local councils will barely see an increase of 1% in their budgets. There is the perennial promise to spend more on housing which have rarely lived up to the promises.
A new digital sale tax of 2% on tech companies is promised, but significantly less than the 3% proposed by the UK. A sign of the post-Brexit trade and tax wars that will intensify. The government says digital tax would raise £400 million from 2020, which hardly seems ambitious. The assumptions behind the number are not known.
The personal tax free allowance is to be increased from £11,850 to £12,500 in April 2019 which is good news for many but will be barely enough to cover increases in the price of gas, water, electricity and travel. It won’t do anything for those with incomes less than £12,500. The Higher rate threshold will increase from £46,350 to £50,000. You can see the government’s priorities.
Since the 2017 election, Conservatives have been stealing Labour policies and varnishing them. This was very visible today as the Chancellor announced that he will not sign any further Private Finance Initiatives (PFI) contracts, but unlike Labour will no continue rather than end the PFI contracts. Labour’s 2017 election manifesto promised to make HMRC a preferential creditor and thus safeguard the amounts that are lost upon bankruptcy of businesses. Now Tories have stolen that policy too.
The net result of the government spend on fixing potholes, investing in the NHS and other measures is that the economy can expect to grow at aroudn1.6%, but only two years ago the forecast was over 2%. With each Conservative budget, the economic growth target has decreased and none has been met. The Chancellor began his speech by saying that he tames public debt. That is odd given that the debt in September 2010 was £952bn, and September 2018 it is £1,789.5 billion. Even on the current borrowing the books those balance. The details published by the Office for Budget Responsibility show that the government will need to borrow £19.8bn in 2022-23.
Overall, the government needed to do two things – invest in the economy and improve people’s purchasing power. Despite the hype, it does little of that. A government really committed to rejuvenating the economy would have found more resources. It could have raised £5 billion by just freezing the corporation tax at its current rate of 19% instead of reducing it to 17%, but it did not do that. More could have been raised by returning it to 26%, but the government is hemmed in by its own ideology.