UK Budget must borrow to spend but not increase taxes
Howard Shore, Founder, Shore Capital Group and Puma Brandenburg
To spend, or not to spend, that is not the question for Boris Johnson’s first Budget as UK prime minister. That answer was already delivered in December’s general election, where voters voiced emphatic support for higher public spending. The main dilemma facing the Johnson government now is how to finance this additional spending. Whether to borrow or to tax, that is the question.
The answer to the Budget dilemma is straightforward: in the current unique economic circumstances, borrowing is far more attractive than tax rises.
It is worth reminding ourselves that the government won its mandate on a platform of increasing both capital spending and current spending. With this in mind, new spending should be focused on infrastructure and urban regeneration, including better transport and faster broadband, tax incentives for people to invest in depressed areas, and the creation of free ports. In other words, finding ways of regenerating economic activity where it has fallen behind.
We should also be spending money to encourage the deployment of the science that comes out of our great universities, leveraging the fact we have five of the top 25 universities for life sciences in the world. The UK needs an industrial policy that not only evens up economic outcomes, but will also encourage these outcomes through a better operating environment.
A business case can also be made for the improvements in public services that were pledged at the election. London now has a reputation for knife crime, so recruiting additional police officers is essential for ongoing investor confidence. Providing additional support for the National Health Service and enhancing our schools will create a healthier and more productive workforce. Two major factors weigh in favour of borrowing to fund such spending at this critical time: historically low interest rates and a return of investor confidence after the election.
With the UK now out of the EU and Mr Johnson secure in 10 Downing Street with an 80-strong Conservative majority, investors are beginning to see the UK as a good bet in the world economy. The uncertainty caused by Theresa May’s leadership has been replaced by a positive outlook on the UK’s future, and domestic entrepreneurs are beginning to emerge from the risk-averse position they had adopted. International investors are once again contemplating increasing their exposure to the UK economy.
But investor confidence can be fragile. It could easily be lost were there to be egregious tax rises in this month’s Budget. A proposal to abolish entrepreneurs’ relief risks signalling that risk taking isn’t being encouraged. Cutting pension relief risks discouraging saving for old age, at the very point when the government is rightly coming up with a plan for social care in an ageing society. And talk of expanding inheritance tax is a huge political gamble for relatively little additional revenue. This tax is unpopular for a reason — it undermines aspiration.
The people who generate jobs and prosperity in the UK are already taxed very highly, so further tax rises would send out completely the wrong message. It would suggest that Britain is not open for business; that the country has left the shackles of the EU only to impose fiscal handcuffs on enterprise.
To deliver its political agenda, ministers therefore really have only one option: to increase borrowing. And the government is in a fortunate position because interest rates are so low.
The fiscal rules that the Treasury is currently working under are somewhat arbitrary. So is the distinction between capital expenditure and day-to-day expenditure. The key question that should be considered is affordability. While rates are so low, the government can afford to borrow money to cover additional medium- and long-term spending, provided that the low rates are locked in by borrowing as much medium- and long-term debt as the Bank of England can comfortably fund.
If approached this way, the Budget would boost the economy without discouraging entrepreneurs and savers. The additional economic activity generated would allow public finances to grow faster, thus mitigating some of the extra borrowing.
The 2020s have the potential to be as important for the British economy as the 1980s. The government must lay the foundation for our country’s long-term prosperity now. To achieve this, the UK needs to be the most exciting place to do business in Europe.
When it comes to this Budget, sensible spending increases are eminently reasonable — providing that investor confidence is not kiboshed. Higher taxes could hit the economy as hard as Brexit uncertainty did between 2016 and 2019.
This piece was originally published in the Financial Times.