This may be Osborne’s last chance to bolster our economy against crisis
The Budget is coming up and it’s time for Osborne to give the gimmicks a break, says Matthew Lynn. It's action we need, not words.
We had three Budgets last year (if you include the autumn statement). Chancellor George Osborne is presenting yet another next month. Even the most imaginative Treasury mandarin must be struggling for headline-grabbing initiatives. A tax break for "mindfulness" training? An "Uber" tax on the "gig" economy to stop it destroying too many established industries? Higher spending on whatever health fad is popular that week? But it's time for Osborne to give the gimmicks a break. He has talked of "fixing the roof while the sun is shining" now he must act on that. If he doesn't, the next crisis will be even worse than the last.
Osborne is already nearly the longest-serving Conservative chancellor of the modern era, close to overtaking the six years and four months that Nigel Lawson managed. In many ways, he's done well. The economy has stabilised. Public sector borrowing, which once threatened to overwhelm us, is under control. Corporate tax rates are among the most competitive of the major economies. Huge numbers of new jobs have been created. Those are substantial achievements. But he hasn't been a great reformer he rivals even Gordon Brown in his appetite for fiddly rule changes.
Yet with a secure majority, Labour in chaos, and the 2020 election as sure a bet as it can be, this is surely the time to be bold. Here are three places he should start. First: simplification. The government has done shockingly little to simplify a tax code clogged with thousands of pointlessly complex rules. In many ways, it has got even worse changes to inheritance tax and buy-to-let are a dog's breakfast, which a future chancellor will painfully have to unpick.
And while it is great to have lower corporation tax, making it so much lower than income tax is distorting behaviour in an unproductive way. Indeed, one reason Osborne has had to raise dividend taxes is because the self-employed set up companies to take advantage. Lawson used to scrap a tax with every budget.By now it would be easy to scrap two or three every year and the system would be much improved.
Second, tackle total debt. The crash of 2008 was a debt crisis. Yet very little has been done to reduce that. We may now be at the peak of the economic cycle, but government borrowing remains obstinately high. If the books are not balancing now, when will they be? Personal debt is still soaring according to Aviva, the average family's debts, excluding mortgages, jumped from £9,520 to more than £13,500 in the last year alone.
If we go into recession with debt at those levels, it could easily spiral out of control. Why not change the Bank of England's target from 2% inflation (which it shows no signs of hitting) to a target for 2% real (after-inflation) returns for savers, so it has scope to raise rates as soon as the economy can stand it. Otherwise, debt will just rise relentlessly.
Finally, improve incentives. Raising the tax threshold and having a higher minimum wage are good ideas, but they don't do much for the middle classes the majority of the working population. The 40% tax band is becoming a major deterrent it kicks in at just over £40,000 a year hardly a fortune for anyone raising a family. The Scottish Tories have proposed a 30% band to prevent there being such a sharp jump from 20%. Why not steal the idea for the whole UK?
Running an economy is not that hard. Keep taxes low and simple, and debts under control, and you should do fine. Controlling public spending and making the UK more attractive to global companies have been worthwhile policies. But our economy still looks dangerously exposed to a global downturn, even one more modest than seen in 2008. Now when the sun is still shining is the time to make the structural reforms that would make the UK far more stable. The 16 March budget may be the last real chance.