Editor's letter

The national debt really does matter

From the Budget, you'd think Britain's growing national debt won't have any consequences, says Merryn Somerset Webb – despite history suggesting otherwise.

920-Hammond-634
Hammond's key takeaway is that debt doesn't matter

We expected Philip Hammond's pre-Brexit Budget to be more of a stop-gap speech than a proper package of policies. And so it was. In this week's issue, John Stepek has pulled out some of the few interesting bits (the bits that will affect your personal finances in the immediate term are in this week's magazine). His key takeaway is a little bit boring, but very important.

The semi-abandonment of "austerity" reflects the new consensus among parties that debt doesn't really matter despite many thousands of years of evidence to the contrary. That's a very bad thing, as will become increasingly clear as our baby-boomers age, need exponentially more spent on their health and social care, but find that barring a wave of nasty new tax rises the money just isn't there.

Maddening as this all is, for me the most interesting bit of the Budget (relatively speaking) was the one genuinely new measure from Hammond the tax on digital services. This isn't set to be huge. It isn't due to come in until April 2020; will be set at 2% a year on the revenues of companies with "specific digital platform models" and turnover of more than £500m; and is only forecast to bring in £400m a year (which is unlikely to cover the costs of even the tiniest proportion of the new hips our boomers will soon be needing). But the money aside, there are two important points to make about it.

First, it is all about globalisation. Existing tax rules were designed for a day when big firms had physical factories on the ground and paid tax where those factories were. They don't work so well when, as the Financial Times puts it, big companies "can choose where the taxable value they create is added and then domicile that value, quite legally, to where they will forfeit the least".

Second, it is all about the nation state. We have been told for a long time that in a globalised world there is nothing to be done to make multinationals pay the tax national governments want (and need), and that any action must be internationally backed the European Union is looking at a 3% levy, for example. Hammond clearly doesn't think that is so. Nor do the governments of Spain, Italy, Israel, India, Mexico, Chile and South Korea, all of whom are either discussing measures or have put some in place.

The multinationals tech and traditional have, as we have said before, had a wonderful few decades. They've paid tax where they have liked, they have leveraged the globalised labour market to their huge advantage, and they've paid almost nothing for the debt they've used to goose returns for shareholders. But those days are coming to an end.

Wages are rising everywhere (note Hammond's rise to the National Living Wage), interest rates have turned, and governments have had it with digital tax dodging. If you are looking for a message from the Budget, perhaps this is it: times are getting tougher for the world's big firms and we should invest accordingly.

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