Rishi Sunak’s ‘honest’ Budget has passed one big test – but only because he isn’t being believed

A major challenge for any chancellor is the next-day analysis by the independent Institute for Fiscal Studies, writes John Rentoul

‘I am levelling with the British people,’ said the chancellor (REUTERS)

Rishi Sunak has torn up most of the constitutional conventions about Budgets. There used to be an absolute ban on official comment on tax changes in the weeks before; this time all the main changes were announced in advance.

But one ancient tradition never changes. The Budget is not finished until the independent Institute for Fiscal Studies (IFS) has spoken. The IFS always issues its verdict at a briefing for journalists the next day, which always features “The Slides”. Long after PowerPoint has finally been banned, The IFS slides will still be an annual (and sometimes biannual) post-Budget event.

Sunak will be relieved that his Budget survived this morning’s IFS briefing in one piece. The overall verdict from Paul Johnson, the IFS director, is that the chancellor “is not stinting” in his response to the economic damage of coronavirus and the lockdown, “erring on the side of generosity”. If unemployment really does peak at “only” 6.5 per cent, as the Office for Budget Responsibility (OBR) predicts, Johnson said that would be “a remarkable triumph”.

The IFS was sceptical about Sunak’s repeated insistence that he was being “honest” with the British people about what is needed to repair the public finances in the longer term. The chancellor announced two big tax increases: a rise in corporation tax rates in two years’ time, and a rise in income tax achieved by freezing thresholds, allowing more people to be dragged into paying tax, and into paying higher rates, by the general rise in earnings. As Johnson said, these are tax rises “which will be somewhat hidden from most of us”.

But at least the chancellor was open about them, and even said in his Budget speech that freezing income tax thresholds “does remove the incremental benefit created had thresholds continued to increase with inflation – we are not hiding it”.

Where the IFS was more doubtful, though, was about the government’s spending plans. These were not a big feature of the Budget, having been set out in the spending review in November, but Sunak yesterday announced a cut of about £4bn a year in spending on public services after next year.

The Treasury presented this as a technical change because of a lower OBR inflation forecast, but this is “a particular measure of inflation, depressed by current lockdowns”, according to Johnson, which “means the chancellor isn’t really levelling with people about the choices the government is making to repair the public finances”.

He does not expect the government to stick to these spending plans, asking: “Are we really going to spend £16 billion less on public services than we were planning pre-pandemic?” The NHS is one obvious pressure point, and the Labour Party is already adding to that pressure in its “day two” Budget response today. But the IFS pointed out that the demands for more money for schools catch-up, the courts backlog, public transport deficits and social care will also be hard to resist.

Sunak himself said in the Budget that he rejected the idea of making savings from public spending: “When we said at the last election that we were the party of public services, people believed us – and they were right to believe us.” He and the prime minister have made it clear that they cannot possibly go back to anything that might be called “austerity”. In which case, as Paul Johnson said, “The chancellor’s medium-term spending plans simply look implausibly low.”

So the IFS verdict overall was that this was a good Budget, with two reservations. One is that Johnson hinted that it was if anything too generous in its continuing high level of pandemic response spending; the other is that he worries about the two-year tax subsidy for capital investment. “It will subsidise investments that would not be economically viable without the subsidy,” he said.

But it was only a good Budget because it sets out public spending plans that the IFS doesn’t believe. Politics will require higher spending and so, as is almost always the case, the aim in the Budget to get the public finances into current balance – that is, borrowing only to invest – will take longer to achieve than the target date of 2025-26.

Sunak’s “honest” Budget passes the IFS test, but only because the IFS thinks he is not being honest about his public spending plans.