IEA release briefing ahead of the Budget 2017

The Budget should pursue policies which reduce the budget deficit, establish a more coherent tax system and improve long-term fiscal responsibility. A new briefing from the Institute of Economic Affairs argues that less action is better than too much, calling on the Chancellor to avoid the temptation to tweak policies or make knee-jerk responses to economic data.

The economy has performed better than most had expected and there is no need for a major fiscal stimulus either to boost demand or raise productivity. The Chancellor should therefore resist the siren calls to ramp up public spending and focus instead on reducing the burden of tax and regulation, allowing the economy to make the most of the opportunities presented by Brexit.

Reasons for optimism

•    Quarterly growth in GDP has averaged 0.4% in the five quarters since the Brexit vote, which is only marginally slower than the pace in the five quarters before the Referendum. Unemployment has also continued to fall.
•    With the pound relatively stable for the last 12 months, price inflation should fall back. A combination of lower inflation and faster growth in nominal wages should boost consumer purchasing power.

Reasons for caution

•    Public sector net borrowing has returned to pre-crisis levels, yet years of huge deficits have more than doubled the stock of government debt which is now equivalent to 87% of the value of the goods and services produced in the UK economy each year.
•    The UK’s debt interest payments for 2017-18 are the same as the UK’s entire defence budget, or half the education budget.
•    The reduction of government spending to pre-crisis levels as a share of GDP is a result of the recovery in the rest of the economy, not because of public sector savings.

Taxation: 

•    The Chancellor should ignore the temptation to address intergenerational inequality with gimmicks, such as tax breaks for younger people or a temporary cut in stamp duty for first-time buyers.

•    Being ‘young’ is not a good basis for paying less tax. It could mean a City trader in their 20s paying less tax than an NHS consultant in their 50s. Moreover it would be unfair to women who may take a career break.

•    A temporary cut in stamp duty for first-time buyers would likely backfire, either by pushing up prices for everybody or by subsidising first-time buyers only at the expense of those buying for the second time. The latter includes young families, who are not obviously any less worthy of support.

•    Ideally, stamp duty should be abolished. It is a pernicious tax which clogs up the market, stopping people from moving when they want or need to, such as for a new job or to downsize. That harms productivity and keeps some elderly couples in houses that are far too big for them. Failing that, the Government should announce a fundamental review of taxes on property should be announced – including stamp duty, capital gains tax, inheritance tax, council tax and business rates.

•    To level the playing field for the young, the Government must tackle the underlying problems that mainly affect the young, including the lack of housing supply, and by withdrawing subsidies which mainly benefit the elderly regardless of need.

Spending commitments:

•    The public finances remain in poor shape. Any spending increases must be small and partly funded by savings on contributions to the EU.

•    Whilst a lift of the public sector pay cap looks inevitable in some areas, it is difficult to argue that public sector workers as a group are particularly disadvantaged – average pay remains higher than in the private sector even without taking generous pension arrangements into account. The Government instead should end national pay setting to allow greater flexibility.

•    The Chancellor should also resist the calls to boost productivity with a splurge of public investment. Rather he should focus on measures that free up the economy without spending enormous amounts of other people’s money, such as liberalising planning laws to facilitate housebuilding and devolving more fiscal powers to the regions.

•    Old-age welfare should be determined on need rather than age alone. This should include the ending or means-testing of pensioner benefits, the replacement of the triple-lock on state pensions with a single link to CPI inflation, as well as the scaling back of various tax reliefs.

Commenting on the briefing, Julian Jessop, Chief Economist at the Institute of Economic Affairs, said: 

“The Chancellor should resist the siren calls to ramp up spending and focus instead on reducing the burden of tax and regulation. That would be a truly ‘bold Budget’.”

Notes to editors:

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To download a copy of the IEA’s Budget Briefing, please click here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems and seeks to provide analysis in order to improve the public understanding of economics.

The IEA is a registered educational charity and independent of all political parties.