Beyond the Budget headlines

The internet is awash with commentary on the Coalition's first budget. Most commentators focus, understandably, on the headline measures: VAT increased to 20 per cent, a £1,000 increase in the income tax personal allowance, and prospective reductions of 25 per cent in most departmental spending budgets as the government aims to eliminate its fiscal deficit over the course of the parliament. My aim here is to look beyond the headlines, highlighting some important budget-related issues, which are unlikely to get much airtime in the next couple of days of post-budget discussion. Instead, they are 'slow-burners' which may assume increasing importance in the years ahead as their implications become clearer.

The internet is awash with commentary on the Coalition's first budget. Most commentators focus, understandably, on the headline measures: VAT increased to 20 per cent, a £1,000 increase in the income tax personal allowance, and prospective reductions of 25 per cent in most departmental spending budgets as the government aims to eliminate its fiscal deficit over the course of the parliament. My aim here is to look beyond the headlines, highlighting some important budget-related issues, which are unlikely to get much airtime in the next couple of days of post-budget discussion. Instead, they are 'slow-burners' which may assume increasing importance in the years ahead as their implications become clearer.

First, there was a change to the uprating system for benefits and tax credits for working age families*. These will now be uprated by Consumer Price Index (CPI) inflation rather than the Retail Price Index (RPI), which was the previously used measure for most benefits. This sounds like a minor technicality but over the long run it could make a very big difference. Between 1999 and 2009 the Consumer Price Index increased by 20 per cent, whereas the Retail Price Index inflation was around 29 per cent. Therefore benefits are 9 per cent more generous than they would have been if this policy had been introduced in 1999.

The government has defended the change to CPI on the grounds that RPI includes housing costs (which are covered by Housing Benefit) and so CPI is the more appropriate measure to use. Maybe so, but recent empirical work by researchers in the Minimum Income Standards team at Loughborough and York Universities has already found that most people whose sole income is from benefits are already some way below income levels that members of the public think would be sufficient to maintain an adequate standard of living.  This uprating change will only exacerbate the problem for many low income households, and the problem will probably get worse over time.

One option for improving the living standards of low-income families is to get more of the working age population into work, and the Budget highlighted Britain’s relatively high proportion of workless households. However, one crucial determinant of employment opportunities for working families with young children – childcare policy – was not mentioned at all in the Budget. Back in 2004 the then Labour Government published its Ten Year Strategy for Childcare, which  envisaged a substantial expansion of free childcare for 38 weeks per year for all three and four-year-olds. Even before the economic crisis blew a large hole in the public finances, additional spending resources for this expansion were very tight. In November 2009 a report from the Daycare Trust estimated that for the government to meet its free childcare target for three and four year olds would require £4.2 billion additional spending. Given that the extent of the cutbacks in public finances surely means that funding on this scale will not be made available, we need to ask what the alternative strategy for childcare provision should be. Will we have to move towards an economy with more one-earner couples, because two-earner couples can't afford childcare provision? And how will the government encourage lone parents with pre-school age children into work without additional resources for childcare? Childcare policy has dropped out of the headlines somewhat over the last five years or so, but is in need of fresh attention.

Finally, the Budget forecasts assume that the long-run trend rate of growth in the economy will be 2¼ per cent, rather than the 2½ per cent which the previous government assumed. That sounds like a tiny adjustment, but in the long run it makes a big difference to how large we assume the economy will be in future. Over 25 years, the economy will be roughly 10 per cent smaller at a 2¼ per cent rate of growth than at a 2½ per cent rate. Clearly this makes a large difference to the amount of resources available for public services, infrastructure and so on.

In terms of wider economic strategy, there is a big question mark about where even 2½ per cent growth per year is going to come from. Our most successful industrial sector in the 2000s – financial services – has taken a huge hit in the 2008-09 recession, and its growth prior to that was based on a largely unsustainable model of “bubble” investments of ever-increasing risk. Recent suggestions for an alternative engine for UK growth mainly focus on high-tech manufacturing and environmental industries (“green” jobs) but the intellectual foundations to explain how this shift in industrial structure might take place, and what the government needs to do to create the right conditions for it to happen, are still underdeveloped at present.

All three of these issues are likely to come increasingly to the fore in future years as the debate turns from deficit reduction via tax rises and spending cuts to assembling a platform for long-run sustainable and inclusive growth. But it would be as well for the UK economy’s long-term prospects if the debate over policy areas like this were to begin in earnest as soon as possible.

* Benefits for pensioners – the State Pension and Pension Credit – are not subject to this policy for this parliament as they will be uprated by the minimum of earnings growth, price inflation or 2.5%.