Growth? Not in this Budget

Economic Perspectives – 96 

Emile Woolf, Going Postal
Gladstone’s red box
The National Archives UK profile, No restrictions, via Wikimedia Commons

We have just endured yet another March Budget in which the Chancellor sets out his strategy for balancing the nation’s expenditure plans with its available resources, principally from taxation. They are, of course, his spending priorities, and his tax-raising plans, or those of his party, or those he thinks will please voters or – simply, what he believes he can get away with. In short, they arise as much from political as from economic considerations.

Although this particular budget is set in the context of the nation’s struggle to survive the impact of a devastating pandemic, there are always choices – choices that reflect the Chancellor’s own aspirations for a post-pandemic future. They also reflect his longer-term political philosophy – the direction of travel, how to stay on course, and his vision of its destination.

Forty years go: compare and contrast

Is that asking too much of a new initiate to high office? “Cometh the hour, cometh the man”, as the saying goes. On the basis of this budget, however, I doubt that Rishi Sunak can lay claim to that title. Please consider the contrast between last week’s budget and that of March 1981, precisely 40 years ago. Although there was no virus pandemic, the economy was in deep trouble. Despite the odds, it emerged as one of the most remarkable budgets of modern times – the work of Margaret Thatcher and her Chancellor Geoffrey Howe. Not only did it sound an original note, but the precepts on which it was based flew in the face of all contemporary left-wing economic thinking.

No sooner had Chancellor Howe completed his delivery, than 365 academic economists sent a round-robin letter to The Times, published on 30th March, which condemned the budget in the strongest possible terms. Its authors declared their unequivocal conviction that “there is no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control and thereby introduce an automatic recovery in output and employment”, concluding: Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Note the disdain in which those words “deflating demand” are uttered. This is a reflection of the thrall in which the great Keynesian god of demand stimulation was held.

Anyway, it seems that, somewhere on high, the spirits of David Ricardo and Adam Smith got together and decided it was time to give these 365 great academic theoreticians a lesson in real economics. From the moment their letter was published the economy embarked on a prolonged phase of vigorous growth – the very antithesis of the letter-writers’ grave prediction that the Thatcher/Howe measures would thrust the economy into a self-perpetuating downward spiral. In the event, their measures initiated eight years of uninterrupted growth and left all those economic experts bewildered and thoroughly discredited.

From desolation to revival

Remember that the backcloth faced by the Thatcher administration in the early ‘eighties included double-digit inflation, high unemployment, massive public borrowing and an uncompetitive manufacturing base, hobbled by the implacable demands of powerful trade unions. Seen in retrospect, what Thatcher accomplished owed nothing to the shibboleths spouted by a generation of scribblers – it was rather that she resisted the lure of conventional thinking, no matter how plausibly it was presented. She, Howe and their advisers opted to risk public scorn by trusting their own sense of what would restore economic growth – which, ultimately, was what mattered.

Their instincts favoured minimal state intervention in free markets, including the labour market – which meant curtailing the union power that shredded productivity and rendered British industry so uncompetitive. They tackled inflation by reducing government spending targets and enforcing strict controls over the money supply, while enhancing personal pride and independence by boosting home ownership through the sale of council properties. Then Nigel Lawson’s tax cuts produced a further surge in growth. As wages rose and unemployment fell the government coffers began to look healthy again.

Much the same economic philosophy guided the USA out of recession. When President Reagan ordered the largest tax cut in American history he was asked whether its impact on the deficit worried him. “Oh, I’m not worried about the deficit; it’s big enough to look after itself.”

But the lessons are still not learnt

Those of us looking out for a taste of these desperately needed animal instincts in Sunak’s budget last week were disappointed. Sadly, we were fed a gruel that might have been concocted to usher in a return to large-state dependency. His focus seemed to be balancing the budget on the back of tax rises that will inevitably restrict, not promote, growth. Can he not see this? Even his “superdeduction” of 130% for companies’ capital expenditure, seen objectively, doesn’t amount to a genuine tax saving – it’s merely another distortion: it subsidises investments that would not be commercially viable without the subsidy.

Ultimately all expenditure is written off, but this budget creates unintended distortions in the tax system between investments in, respectively, tangible and intangible assets. Will the development of a new website lasting, say, five years be treated in the same way for tax purposes as new machine tools? And what of the thousands of companies, including those in financial services, that have relatively low capital expenditure anyway? They will still be facing a huge hike in corporation tax that increases the cost of capital, presenting them with a higher investment hurdle.


This style of tax-distortive tinkering fools nobody. The UK’s shambles of a tax code, now 12-times longer than the King James Bible, is a sick joke. The Chancellor’s fiscal manoeuvring does not amount to a coherent strategy – it merely harks back to the days of crony vote-catching, characterised by an absence of any worthwhile vision. Both now and forty years ago the economy was in shreds, and needed a massive boost. But how? Forty years ago the answer lay more in the nature of instinct than rocket science. Now?

Those who believe it’s invidious to compare today’s conditions with those of forty years ago should remember the French maxim, “plus ca change, plus c’est la meme chose.” On the surface, much has indeed changed – but what hasn’t changed is a wretched adherence to statism as the quintessence of government; coupled with blindness to anything conducive to genuine growth-generation.

Until that changes, for those of us who put forward the case for a smaller state, lower taxes, less regulation, free markets and sound money, the crushing spectre of a return to big-state socialism looms.

© Emile Woolf March 2021 (website)

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