1. This was an unexpectedly significant budget
Much of the briefing in advance had suggested that this would be a relatively modest and technical budget, presented alongside a spending review that would set the contours for government activity over the next three years within tight constraints.
Not so. Including the announcement this year of the national insurance rise to pay for health and social care, yesterday’s budget amounted to a dramatic change in the government’s approach.
The tax burden will rise to levels not seen since Clement Attlee’s Labour government rebuilt Britain after the Second World War. And the proceeds will be used to fund an increase in the size of the state, reversing some — though far from all — of the austerity measures pursued by Boris Johnson and Rishi Sunak’s Conservative predecessors.
2. Conservative ideology has changed
So does this mean that the Conservative Party of today is substantively different to the Conservative Party which re-entered government with David Cameron and George Osborne at its head in 2010? Yes, it probably does.
That, at least, was the suggestion of Simon Clarke, the chief secretary to the Treasury, who described the budget last night as “something of a philosophical shift”. He told the BBC: “What we want to see is to get the economy turbocharged, unlock productivity, and to deliver growth more evenly across the UK. That does require some upfront spending.”
Michael Portillo, who was a chief secretary to the Treasury when Sir John Major was prime minister, put it rather more starkly. “This is certainly not Conservative philosophy,” he told Times Radio. “This is something quite different. This is what Conservatives absolutely do not believe in.”
But higher public spending is simply the logical corollary of Johnson’s rhetoric about levelling up and improving public services. To some degree, then, the budget represents government policy catching up with Johnson’s political approach. It also might be seen as the natural consequence of a Conservative electoral coalition which has changed in big ways not just under Johnson’s leadership but ever since politics began realigning around Brexit divisions in 2016.
Once the Conservatives won many traditional Labour seats — Clarke’s in Middlesbrough being one of them — it was inevitable that its governing approach would change to reflect their new voters’ expectations too.
3. Boris Johnson is in command of his government
Prior to the budget, the crude assumption in Westminster was that Johnson wants higher spending — and is willing to accept increased taxes to fund it — while Sunak believes in a more limited state. If that is right, this was a budget which showed Johnson to be unequivocally in charge of his government.
That might seem obvious: Johnson won the Conservatives their biggest landslide in three decades less than two years ago. Yet there has occasionally been discussion of whether he has done enough to grip the reins of government, or even whether he might not survive the parliament.
On yesterday’s evidence, he remains in complete command of his party and government.
4. But Rishi Sunak wants people to know he is a Thatcherite
Arguably the weirdest passage of Sunak’s speech was his peroration in which he denounced big government. “Do we want to live in a country where the response to every question is what is the government going to do about it?” he asked. “Or do we choose to recognise that government has limits?”
In context, it felt like a bizarre attempt to deny the reality of what he had just announced.
The section perhaps owed something to Ronald Reagan (“The nine most terrifying words in the English language are: ‘I’m from the government, and I’m here to help’”) as well as amounting to an assertion of standard Thatcherite belief.
It may prove useful to Sunak as a marker — not only to the public, but also to Conservative MPs, about his fundamental beliefs. It was a signal that as the economy grows he will try to cut taxes. But it could also act as a reminder to Conservative MPs, should they sour on Johnson one day, that there is another approach available.
5. Tax cuts are likely towards the end of the parliament
Sunak said this morning it was his “mission” to see taxes come down over this parliament, which is set to last until December 2024. The forecasts published yesterday by the Office for Budget Responsibility (OBR) predict that Sunak will achieve a surplus in the present budget of £12.5 billion in 2023-24, rising to £25.1 billion, or 0.9 per cent of GDP, in 2024-25.
That should allow him space for tax cuts just in time for the next election — although of course Johnson may decide to call an election before then.
It is also worth bearing in mind that one reason Sunak was able to be more generous than expected, especially in departmental spending, was that the OBR’s forecasts have become more sunny. Not only did they predict higher growth than earlier this year, but they also revised down the impact of long-term economic “scarring” from the pandemic, from 3 per cent of GDP to 2 per cent.
Yet the Bank of England is more optimistic, forecasting the scarring effect at 1 per cent. If the OBR were to revise down its scarring forecast again, this would give Sunak even more space for pre-election tax cuts.
6. Stagnant wages should worry the government
Ever since the Conservative Party conference, the vow to create a “high-wage economy” has become one of the government’s catchphrases — and it was repeated by Sunak yesterday. And yes, there was a significant increase announced in the budget in the minimum wage plus the end of the public sector pay freeze, albeit with scant detail on how much their pay might rise by.
Yet the stark assessment of the Resolution Foundation this morning is that real wages will fall next year, with the UK mired in its weakest decade for pay growth since the 1930s.
There is a risk for the government of a jarring disconnect between the nominal rises in wages, and the rhetoric which accompanies them, and what the electorate actually feels their purchasing power to be.
7. Inflation will get worse before it gets better
The spectre of inflation haunted the budget. According to the OBR, inflation will hit 4.4 per cent next year, although they added that in the short time since their forecast had closed figures suggested the eventual rate of inflation would land closer to 5 per cent.
Sunak attributed most of this — not unreasonably — to global factors during his budget speech, but was downbeat about his ability to fix it. Pressures on supply chains and energy prices “will take months to ease,” he said, adding that “it would be irresponsible for anyone to pretend that we can solve this overnight”.
Maybe so, but if inflation really does last so long expect Sunak to come under renewed pressure to do more to help Britons struggling with the cost of living.
8. Universal credit taper tweak does not compensate for the end of the uplift
In the absence of any other tax cuts to boast about, Sunak determinedly cast the cut in the taper rate of universal credit from 63 per cent to 55 per cent as slashing a “tax rate on work” rather than a boost to government benefits.
Whichever way it is spun, the decision is popular on the Conservative benches, bringing the rate in line with what Iain Duncan Smith wanted when he conceived of the new benefits system, and going some way to soothing frustration among MPs who thought the £20 uplift in the rate of universal credit should have been kept in place.
But the taper rate does not do the same thing as the uplift, and will not be enough to compensate most recipients of universal credit for their loss of income, with about three quarters remaining worse off after both changes are taken into account.
9. Austerity may be over but its effects are still felt
Sunak’s above-inflation increases in budgets for all Whitehall departments, totalling £150 billion over the course of the parliament, represent a marked change of approach from the austerity years. But the extent of austerity means that even this largesse will still leave the vast majority of departments far short of where they were in 2010. The Ministry of Justice, for example, will have seen its real-terms budget fall 12.2 per cent between 2010 and 2025, and the Ministry of Defence sees a drop of 10.4 per cent.
Conservative MPs believe that voters see Johnson and Sunak as an entirely new government, far removed from the Cameron and Osborne years.
They may be correct about that: the parliamentary party and the government have changed a lot in recent years, and Sunak became an MP only in 2015.
And many Conservatives fully on board with the decision to expand the size of the state would argue that the austerity measures were necessary to get public finances back on an even keel to allow for decisions like those announced by Sunak yesterday.
Whether that is true or not, the fact that many departments remain smaller and poorer than they were in 2010 is a reminder that this budget is far from a fully-fledged return to the Labour years.
10. The NHS dominates spending
Health spending is an exception: by the end of the parliament it will be 40 per cent higher than in 2010. Compare that to education spending, one of the other rare exceptions, which will be about 3 per cent higher than in 2010.
“This is not a set of priorities which looks consistent with a long-term growth strategy, or indeed levelling up,” Paul Johnson of the Institute for Fiscal Studies said this morning.
It will fuel frustration among Conservatives who would like to see the investment in public services accompanied by a plan for their reform.