The summer statement provides an update of the Government’s view of the economy which is, in general, upbeat. The timing is a bit unfortunate, coming as it does a few days before the British vote on EU membership which could have a serious impact on the outlook. If Britain does vote to leave, the growth and tax forecasts will have to be amended and the scope for budgetary largesse could shrink significantly.
For the moment, the budgetary outlook remains fairly benign. There are uncertainties in terms of tax revenues and our reliance on corporation tax. However, to some extent this is taken account of in the forecasts. Given a fair wind, the trends suggest that the tax take this year will again outstrip expectations.
The Government is promising to use the bulk of extra resources to increase spending. It is correct to aim to spend more on capital investment – indeed even the increased allocation still looks low, given the economic growth rate. It also faces urgent day-to-day spending pressures in areas such as health. Like all recent governments, it promises to spend money wisely and secure better value. But doing this is very difficult and delivering better services with little enough by way of additional resources may well be the challenge that defines this administration.
On taxes, it is maintaining its promise to phase out the USC, but to limit what higher earners would gain. While tax reform remains important, the danger is that this strategy contributes to a gradual narrowing of the tax base in the years ahead. Remember water charges are on hold, too, and there is a promise not to increase the local property tax for a period of years.
Above all, caution is called for. With our debt level still high and a need to add to this via further borrowing, low interest rates and strong growth give the opportunity to make significant progress in restoring order and safeguarding ourselves against future risks. It does not mean that spending and tax measures cannot be planned, of course, but only within the overriding framework of a return to a genuinely sustainable position.