Today's Budget was full of giveaways and short-termist measures. What it didn't do was tackle the politically fraught issue of protected areas of spending
A habit of recent years has been to characterise Budgets by their giveaways. This year’s was no exception. Among other things, Budget 2013 provided a more generous tax break for childcare costs. While there may be good reasons for the government to support mothers in work, it is not clear that this tax break is the answer.
If the childcare sector is supply constrained, then putting new money into this system may achieve little more than to drive up costs. Further, at a cost approaching £1 billion this is an expensive change in direction. It contrasts with policies such as the cuts to the child tax credit and the means-testing of the child benefit. The picture created is one of confusing U-turns.
The Budget also announced changes in age-related spending. Planned reforms to the funding of care and the state pension have been brought forward to 2016 from 2017. There is already concern over the challenges in successfully implementing these policies and it is hard to see a reason for this shift, beyond providing a quick boost to National Insurance Contributions.
Take the case of the Dilnot cap on care costs. As Lord Warner, James Lloyd and Reform have all argued, much more work still needs to be done to ensure that local government and financial services are in a position to work with these reforms when they go live. And this is taking place in what is a congested policy space, with businesses already dealing with the continued roll out of pension auto-enrolment.
Changes to age-related spending have a major impact on the Budget as a whole. Along with the NHS and schools, this is one of the three largest budgets, accounting for around two out of every five pounds spent in 2012-13. Indeed, 60 per cent of the increase in spending between 2011-12 and 2014-15 can be attributed to these three areas. But the coalition has not got age-related spending under control.
Aside from the increase in National Insurance contributions, the single tier pension is not expected to save money before the 2040s. While the coalition had brought forward Labour’s plans to increase the retirement age, savings are being offset by the increase in the way that the state pension grows over time (the 'triple lock'). Cuts to poor value for money spending on universal pensioner benefits continue to be ruled out. Overall the approach has been to increase taxes to fund more generous entitlements.
One consequence of ring fencing major budgets is that spending has been cut according to political considerations not value for money ones. This means that a relatively high burden has fallen on a smaller number of departments, capital budgets and working-aged welfare (which is an important part of the automatic stabilisers).
To compensate, the government is reducing departmental spending further to fund extra infrastructure spending. But the short term economic benefit of bringing forward infrastructure spending should not be exaggerated. Also, while infrastructure can play an important part in lifting the long run growth potential of the economy, this depends on selecting the right projects and funding arrangements. Today’s announcement does not deal with deeper structural issues in the UK’s infrastructure market, such as concern over the government’s procurement capability.
The chancellor was right to argue in his Budget that the government must 'equip the UK to succeed in the global race, build a stronger economy and a fairer society and to support aspiration.' But this requires going beyond the short-term debates that dominated today.
As Ben Gummer MP has argued, 'tinkering with the comprehensive spending review every six months at the despatch box is no way to match government spending to income, nor to gauge whether that income is appropriate to the size and speed of growth of the economy.'
The chancellor had a chance to provide this bigger picture by setting out the end of the ring-fences for the largest budgets and a new, more robust fiscal rule. On both of these counts today’s Budget failed to deliver.
Patrick Nolan is chief economist at the Reform think-tank
