There is a risk that this week’s budget will be drowned out by Brexit and ministerial mishaps. But it really matters because the economy is in a precarious position.
The chancellor’s task is not easy. He can’t depart too far from his deficit reduction targets without damaging his already tarnished brand beyond repair. He’s heartily loathed by many of his Tory colleagues as a remoaner and as George Osborne’s representative on Earth. He is faced with a slowing economy at the bottom of the G7 growth league, dragged down by poor productivity and weak revenue receipts.
Productivity won’t improve without business investment, which is hampered by uncertainty over Brexit. Brexit – if it happens – will, at the very least, lead to years of underperformance. At worst, without a deal, it will lead to a massive shock. Not easy.
In the hunt for money hidden down the back of the sofa, we are told that the government “found” £5bn a year in the form of housing association borrowing, which has been reclassified as “private” rather than “public”.
The current orthodoxy is to curb all borrowing – but the government must free up investment spending
This statistical privatisation is the mirror image of the statistical nationalisation of Network Rail in 2014. The consequences have been unfortunate; Network Rail’s economically important and beneficial investment programme has since been slashed by the Treasury.
This experience underlines a central failing in Hammond’s approach to fiscal policy: an inability or unwillingness to distinguish capital from day-to-day spending. Gordon Brown’s fiscal rules, rightly, separated the two, as did the coalition agreement.
But the ultra-conservative Treasury is always reluctant to accept that well-directed public investment can reduce government net debt by boosting growth and creating assets. The current orthodoxy is to curb all borrowing, whether for productive investment, benefits or civil service spending. The government must free up investment spending.
Network Rail should be free to get on with its capital programme, which is badly needed to improve connectivity in the north, south-west and Wales. The chancellor should also get behind plans for large-scale publicly-financed housebuilding, which even the free-market communities secretary has endorsed with reports he wants £50bn to invest in housing over five years – a sensible if cautious commitment.
If the construction of homes is to double from the 150,000-a-year average of the past three decades, as it must, the government has got to get housing supply moving by acting as a catalyst. This includes the need for more council housing, in addition to investment through new towns and development corporations.
It is absurd to spend billions on housing benefit and the misnamed help-to-buy scheme, which props up prices and demand without attacking the root of the problem – insufficient supply.
There are more difficult trade-offs involved in the understandable demands for more resources for public services and public sector pay. The NHS needs an immediate injection of cash as well as long-term reforms, such as integrating health and social care and prioritising preventive medicine.
And since there is no magic money tree, this spending has to be financed by taxation, confronting the public openly with the choice. That is why my party argues for a penny in the pound of income tax to raise £6bn a year for the NHS.
In the same spirit, cash is urgently needed to offset the harsh and counterproductive squeeze on benefits, notably universal credit. But this has to be paid for, which is why tax cuts over the past two years will have to be reversed.
The growing inequality between generations also has to be addressed. Cutting tuition fees might grab the headlines, but it would harm the funding of universities and do nothing to help young people since this would only benefit highly paid graduates.
What I want to see is all young people being given a proper start in life, through a lifelong learning endowment or account that they are free to draw upon to finance continuing education or reskilling. Better-off older people will, I’m sure, be willing to make a contribution to future generations through the modest taxation of assets that have grown massively in value in recent years.
To put some numbers to this theory, a substantial endowment of somewhere between £5,000 and £10,000 would cost under £10bn annually. This is a big sum, but less than 0.5% of UK personal and property (net) wealth. A progressive reform of capital gains tax, inheritance tax and property taxes could produce this amount.
Some progressive redistribution is easier to achieve if the tax system has some integrity. The corrosive cynicism of the ultra-rich revealed in the Paradise Papers undermines public confidence.
The scope for vast tax windfalls is, however, limited. The changes my colleagues and I introduced in government – the open register of beneficial ownership and the general anti-abuse rule – have reduced the gap between potential and actual tax yield to one of the world’s lowest. But no doubt, much more could be squeezed out of tax avoiders if HMRC were as well-staffed and aggressive as the operation targeting benefit cheats.
It would send a powerful signal if tax-abusing British territories faced an escalating scale of sanctions. If, for example, territories with secretive tax structures ignore requests to improve transparency, they should have the necessary legislation imposed upon them by the British government, or be added to a blacklist banning registered entities from doing business in the UK.
It would also be right to show some of the toughness of the European commission in dealing with large international companies, which currently decide for themselves where and how much tax they want to pay.
These are changes that will make society fairer, while also respecting financial discipline and not relying on magic to balance the books.
• Vince Cable is the leader of the Liberal Democrats, and was business secretary from 2010-15