Jeremy Hunt’s budget is all about preventing stagnation

More or less the entire thrust of Jeremy Hunt’s first official budget today is to increase the growth rate of the economy over coming years and prevent long-term stagnation.

Ever since the financial crash of 2007-8, growth in the UK has been significantly lower than in the preceding 15 years, by at least a third.

And since Brexit and the pandemic, the outlook for our economy has become even worse: the sustainable growth rate per annum has fallen to around 1%, compared with 2.8% before the banking crisis.

The chancellor will announce two strands of “supply side” reforms, whose ambition is to accelerate growth in the coming five years. And he has been anxiously awaiting the verdict of the official forecaster, the Office of Budget responsibility (OBR), which we will also get today.

Strand one is encouragement to businesses to invest more, in the context of headwinds he himself has created, with a decision to go ahead with a rise in the corporation tax rate from 19% to 25% and the end of the so-called super-deduction.

The super deduction was a tax break that reduced a company’s taxable revenue by 130% of the cost of new plant and machinery. It was designed as a boost to the kind of investment that would increase productivity.

Today, against the backdrop of the corporation tax rise, the chancellor will announce 100% first-year capital allowances. They may look less valuable in headline rate terms, but the cash benefit is similar to the super deduction, because of the rise in the corporation tax rate.

There will also be increased tax breaks for investments made in so-called “investment zones”, part of the “levelling up” programme of reducing regional income disparities.

The second strand is increasing the supply of labour, at a time when public and private sectors are struggling to recruit - a problem that has been made worse both by Brexit’s abolition of free movement from the EU and by the near-million people who have left the available labour force since Brexit.

Hunt will encourage young parents to return to work or increase their working hours by providing 30 hours of free childcare to parents with children aged nine months to two years.

This will be seen - by employers - as the most effective short-term measure to increase the supply of working people.

Hunt will also reduce the risk to the disabled of losing benefits if they try employment that does not work out.

He will build in greater requirements to look for work and train for those in receipt of out of work benefits.

And he will allow those saving for a pension to accrue a big pension pot before they incur punitive tax charges - which should, for example, reduce the number of senior doctors taking early retirement.

The net effect of all this should be to increase the UK’s growth and prosperity. It would be amazing if the OBR does not reach that judgement given the mechanistic way it evaluates so-called “potential output growth”.

But here is a word of caution. Back in November the OBR evaluated potential output growth at less than 1.5% in 2023, rising to 1.75% in 2027. Prior to today’s budget, the OBR is thought to have become much more pessimistic, in line with other forecasters.

So the big question is whether Hunt has simply checked the OBR’s pessimism or whether his measures could even persuade forecasters to increase their growth expectations in coming years.

More than anything, Hunt wants to break the cycle of gloom in the UK. It is a challenge that matters to us all.

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