The power of political theatre explains Budget’s enduring mystique
       
Some unravel, some prove historic, but all point to a promised land years away

by: Nick Macpherson
     



When the chancellor announced last November that he would move from two fiscal events a year to one, the Treasury will have breathed a collective sigh of relief.

True to the Augustinian tendencies of his office, which encourages its holders to ignore their own stringencies, Philip Hammond qualified his announcement by making clear he planned to make three Budget statements in 12 months. And who can blame him?

The Budget is one of those great British events, like the Grand National or Trooping the Colour: the subject of TV specials and newspaper supplements.

The media needs its story. And there are always a multitude of sources ready to provide it, some authorised and some not. As permanent secretary I initiated many a leak inquiry. I never caught a single culprit.

But the more interesting thing about Budgets is why they maintain their mystique. It is not as if we live any longer in a world of capital controls, fixed exchange rates and endemic balance of payments crises. And with chancellors regularly appearing on the political chat shows the preceding Sunday, the days of Budget purdah have all but gone.

But just as the media needs an event, so does the chancellor. The Budget is an opportunity to set out the government’s stall for the year ahead. The political theatre this entails has made the office of chancellor of the exchequer the second most important in the government.

And it is why it has taken an austere and principled chancellor like Mr Hammond to move to a single fiscal statement. He may be being astute.

The fact is Budgets are remarkably similar. All of the 34 Budgets I worked on as an official had productivity and growth as a central theme. Yet for all the interventions designed to make Britain more productive, the underlying growth rate has remained stubbornly unchanged at about 2.25 per cent.

And whenever a chancellor has assumed higher trend growth, such as Nigel Lawson in the late 1980s or Gordon Brown in the 2000s, they have usually had cause to regret it. Fortunately, the creation of the Office for Budget Responsibility in 2010 has put paid to such optimism: not because it is intrinsically better at forecasting, which is a mug’s game, but because it is unbiased.

In the old days, much of the debate both within the Treasury and with Number 10 was about the forecast. Now the Treasury can focus on getting policy right.

Too often in the past the Treasury obsessed about the level of demand and steering the economy. Very occasionally this has mattered — as in Alistair Darling’s 2008 autumn Budget. But the bias in favour of deficit financing is big enough as it is. In all but four of the past 40 years the government has run a deficit. And a reminder of the difficulty of delivering fiscal retrenchment is that it has taken until the eighth year of governments committed to consolidation to achieve the much less demanding target of reducing public debt as a share of national income.

Of course, such is the Treasury’s fear of losing control that it tends to become mesmerised by its own targets and rules. I have seen a number of them come and go. From time to time, they have even had a brief impact. But all too often they encourage the Treasury to develop ever more elaborate fiddles and fixes just to keep on the right side of the rule in question. What matters is the substance: get that right, and rules become irrelevant.

Budgets should be about the noble aim of delivering a better tax system. And once in a generation a chancellor surprises us by effecting a tax reform that lasts — think of Nigel Lawson in 1988.

All too often they have the prosaic aim of securing the revenue base. There have been extraordinary changes to tax over the past 30 years. The top rate of income tax has been cut from 60 per cent to 40 per cent and then raised before coming to rest at 45 per cent. VAT has been raised from 15 per cent to 20 per cent. National insurance rates have been raised substantially and corporate tax rates halved.

New taxes have been created, others abolished. Yet the tax take has remained completely static.

Taxes were 33.9 per cent of national income in 1984-85, the year I started work at the Treasury. This year they are projected to be 33.7 per cent.

As Mr Hammond contemplates reaffirming his plans for the highest tax take since 1982, he should bear in mind that such a yield eluded his seven immediate predecessors.

Of course, whatever goes wrong with a Budget is never quite what you expect. Generally, chancellors are pretty good at getting big measures through: such as, say, 2.5 per cent on the rate of VAT. It is the smaller measures which create the difficulties — think of the “pasty tax” on hot takeaway food, part of the “omnishambles” Budget of 2012.

And when the Conservative party is having one of its existential crises over Europe, you have to be very careful indeed.

Having been in a room in the House of Commons with Ken Clarke and John Major the night the so-called Maastricht rebels had the whip withdrawn, I should perhaps have spotted last year that Iain Duncan Smith would resign as work and pensions secretary over disability benefits. It is still a little puzzling that someone should resign over a policy he himself announced. Then again, having seen Mr Duncan Smith’s description of the Treasury as the “worst thing in Britain”, I should really not have been surprised.

But in the end there is only one certainty about Budgets. The promised land is always four years away.


The writer was permanent secretary to the Treasury and is now visiting professor at King’s College London

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