Hamish McRae: Budget switch welcome but we’re flying blind

Philip Hammond will deliver his Budget on Wednesday

Kirsty O'Connor/PA

6 March 2017

It is the last Spring Budget on Wednesday, and about time too. For all of our lifetimes, the budget has been held in mid-March, barely a couple of weeks before the end of the financial year.

This in itself is absurd because people have to plan for the next financial year, and have very little time to do so.

But the practice has been all the more absurd because the budget has been used by successive chancellors as a theatrical episode rather than a measured presentation of how much money is likely to come into the government’s coffers, and how that money is intended to be spent.

The event was usually designed to burnish the reputation of the chancellor as much as the government, and indeed sometimes used by him (always a him) to challenge the authority of the prime minister.

Remember how Tony Blair had to plead with Gordon Brown to get him to say what was in the Budget a few days before he gave it?

But if you think back over the past half-century for really memorable budgets, well, I at least can’t remember too many.

There was Geoffrey Howe’s in 1981 when 364 economists wrote a round-robin letter, saying it would be a disaster — and were naturally completely wrong.

There was one by Nigel Lawson in which he cut the top rate of income tax to 40%, and ended up increasing revenues from high earners as a result.

There was Gordon Brown’s first budget in 1997, outlining the golden rule about only borrowing for investment over the economic cycle.

A great idea, but we know what happened to that. There was Alistair Darling’s one in 2009 when he produced honest figures about the hole in public finances and acknowledged that the deficit would go up to £175 billion, or 10.5% of GDP.

As for George Osborne’s, there was one that set out the path back to a balanced budget — but that didn’t work. And there was one called an “omnishambles”, but I can’t for the life of me remember what was wrong with it.

Now we move to having the main budget in November, taking over from the autumn statement, which gives time for everyone to sort themselves out before the next financial year.

But it does something else. It changes the tone of the budget because it is no longer an announcement of what is happening in the next couple of weeks — it makes the whole process more thoughtful, more measured.

We’ll have to wait and see whether we get better fiscal management as a result but if we can get away from the theatre and focus on the substance, that would be a start.

And the substance this time? Look, we are flying blind. No one has any idea what impact the start of the formal process of leaving the EU will have on the economy.

Maybe it will have none at all — maybe a small negative, maybe a big one. It is even possible it will be positive, particularly if this becomes a very disruptive summer for Europe.

I will be interested in the Office for Budget Responsibility’s growth forecast — will it be as optimistic as that from the Bank of England? — but I wouldn’t trust it.

If the past nine months have taught us anything, it is that we should distrust all economic predictions, or at least recognise that there are wide margins of error.

If you accept all this, the first question to ask of the plans for public finances are how robust are they in the face of extreme events abroad? What happens if US interest rates whizz up much faster than expected, and stock markets drop 25%? What happens if Italy comes out of the euro this summer? What happens if there is a financial collapse in China?

The next question is whether there is any long-term plan to move towards a less complicated and fairer tax system. We don’t have a dreadful one, but it is not particularly good.

And there are dangers. We have, for example, the highest proportion of revenues from property taxes of any major economy. Is that what we want? We have a narrow VAT base, about the narrowest in Europe. Is that a good idea? We rely on the top 1% of earners to pay almost a third of all income tax. Is that safe?

The final question we should ask is whether public spending is wisely allocated.

This is a matter for the spending review rather than the budget as such, but moving to an autumn budget gives an opportunity to ask serious questions about long-term priorities. A government in a democracy is a servant of the people.

If the gap between the governing elite and the people who pay the bills gets too wide, then something happens to close it.

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Hamish McRae: Budget switch welcome but we’re flying blind

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