Austerity may be over – but the chancellor’s problems are not

There remain long-term pressures on this country’s finances, not least an ageing population

There is one huge mistake that the Chancellor, Sajid Javid, may make when he presents his first budget on 11 March. It will be to forget that there is one thing totally beyond the government’s control: the global economic cycle.

No one knows when the next downturn will come or how serious it might be, but odds-on there will be one in the next five years; in fact it may already have begun. The danger is that the chancellor has so boxed himself in with spending and tax promises that the budget deficit, far from coming down or even remaining stable, starts shooting up again. That has destroyed the reputation of many postwar chancellors, most recently Gordon Brown; Mr Javid should not want to join that club.

But he may well do, as he has indeed boxed himself in. The three biggest sources of tax revenue are income tax, national insurance contributions (NICs), and VAT. But this government, like previous Tory governments, has pledged not to increase rates on these; there is even an aspiration to increase the floor at which NICs are levied. If you cannot increase these taxes, which bring in nearly two-thirds of your revenue, you have to scramble around with smaller taxes. As the Institute for Fiscal Studies observed: “The tax lock is bad policy and should not be in the party manifestos.”

It gets worse. There are structural weaknesses in the tax system as spending patterns shift. While VAT revenues have been reasonably strong in recent months, business rates are vulnerable to the shift away from the high street. Meanwhile, excise duties on fuel, tobacco and alcohol are vulnerable to demographic change, as millennials tend to drive, smoke and drink less than baby boomers.

The latest data does suggest a slight falling off in the overall rate of growth of revenues. Nothing dreadful – just enough to make a prudent chancellor a little twitchy.

The question is: will he be prudent? After Philip Hammond left, the mood in the Treasury changed, but the numbers did not. Total government revenues – mostly tax, but also some other sources of income – have been running at between 35 per cent and 37 per cent of GDP for the past 20 years. They were a little lower in the 1990s, and a little higher in the early 1980s, when the North Sea oil started to come in. Right now, they are at the top end of that range. Realistically, they will not go higher.

On the spending side – well, there will be more money for infrastructure. That will be borrowed, and in a sense it is right it should be. Interest rates are historically low, I think unsustainably so, but they will remain low for a bit longer. So it makes sense to borrow now to pay for much-needed improvements. But the money will have to be spent wisely. Crossrail in London is now going to be at least three years late. HS2 increasingly looks unbuildable on anything like the timescale and costs originally approved; there are certainly other, more pressing priorities.

Meanwhile, pressure on other areas of spending will continue to rise: care for the elderly, the NHS of course, probably more on defence, certainly more on the police and civil protection… the list goes on.

The point is that while the extreme squeeze on public spending is over, there are longer-term pressures on this country’s finances – as there are all developed countries – from an ageing population. There are lots of detailed tax and spending issues that need to be fixed (top of that list must come pension tax treatment, with all its unintended consequences for GP doctors).

We should hope that the chancellor will be thoughtful and orderly in dealing with the detail. We should hope, too, that the economy picks up a bit now that uncertainties have started to recede. But Javid needs to build in some slack in his calculations. I know there is the Office for Budget Responsibility overseeing the numbers, but he needs to be responsible himself. This is his one shot to establish his reputation. Make a mess of it, and we are all in trouble.