Set-piece Budgets are a bad way to make fiscal policy. Perhaps that has always been the case. But the problem is especially pronounced now that decisions over tax-and-spend seem to be determined by an effort to game the fiscal rules, and leave the bare minimum of ‘headroom’ against a rolling, five-year debt target.
This is not an argument against fiscal rules per se. Indeed, I rather like the idea of independently verifiable rules that provide an institutional counterbalance to the state’s inherent tendency to grow. (Ryan Bourne, formerly of this parish, has written convincingly about spending caps for the Cato Institute.)
The problem is the way current fiscal rules interact with our peculiar practice of Budgets as political theatre. That dynamic produces decisions on tax and public spending that are extraordinarily short-termist. They rarely embody any kind of governing strategy or sense of what we’re trying to achieve more broadly.
National Insurance, a bright spot in this week’s Budget, is a good example. In the last two years alone, employee National Insurance Contributions rose from 12% to 13.25%, then fell to 12%, 10%, and now 8%. The starting threshold was raised from £9,880 to £12,570, but then frozen as inflation reached double digits – a freeze set to last until 2028.
The Chancellor’s stated ambition to abolish employee NICs is a welcome one (we shouldn’t have two separate taxes on individual earnings). But in this context, you have to wonder whether it is going to last any longer than the ‘Health and Social Care Levy’ that led to NICs being briefly hiked, amid much fanfare, back in 2022. Colour me sceptical.
Capricious governments are hardly a new phenomenon, of course. But we are now looking at two decades in which the per capita GDP growth rate averages just 0.5% a year – about a fifth of what we managed before the financial crisis. At the previous growth rate, our wealth doubled every 28 years. Now? Try 140. This is a profound economic challenge.
It is possible to turn things around – as we discussed on this week’s IEA podcast. But doing so requires that we take a much longer term view, and pursue a sustained programme of pro-growth reform across government. Our current mode of policymaking makes that harder than it ought to be.
