Bill Jamieson: Why £10bn windfall could be a watershed moment for economy

Creeping up almost unnoticed in the relentless Brexit wrangle is a watershed moment for the UK government. Figures released last week showed that the monthly deficit on the public finances is coming in much lower than the Treasury had budgeted for in the Autumn Statement '“ and lower than the recent forecasts from the Office for Budget Responsibility.

The chancellor's spring statement could be an altogether more positive affair than usual. Picture: Christopher Furlong/Getty Images

The figures are substantial. And on present course, chancellor Philip Hammond could find himself with as much as £10 billion more than he had previously bargained for.

That is a helpful windfall by any standards and in marked contrast to the depressing experience of budgets for the past ten years haunted by spiralling debt, constantly missed deficit reduction targets and reinforcement of government spending constraint. Everyday life in Britain has been overshadowed for a decade by budget parsimony, departmental cutbacks and health and welfare provision falling short of the rising demands of an ageing population.

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Now it seems that the chancellor’s spring statement due on 13 March could be an altogether more positive affair. Last month – typically, it must be said, a buoyant one for the public finances as millions made tax payments to meet the 31 January deadline – the government paid back a net £10bn of borrowings. In the first ten months of the financial year it has had to borrow “only” £37.7bn, some £7.2bn less than in the same period of the previous tax year.

The figures point to the Office for Budget Responsibility having to cut its deficit forecast for the full 2017-18 financial year. Back in November it forecast that the annual deficit would hit £49.9bn – up from £45.8bn in the previous year. Now a deficit of around £40bn-£42bn looks on the cards.

While Hammond has said no tax or spending changes will be announced in the spring statement, the latest figures should enable him to portray the public finances in a much more positive light, helped by unexpected strength of self-assessed tax receipts. Analysts at Barclays Bank say that if figures for February and March follow the pattern of last year, the chancellor could have £10bn of headroom.

Good news, then – but it is news that sets a trap, and not for the first time – for a Conservative chancellor. He could – as long-standing Conservative rhetoric suggests – drive on with deficit reduction and secure the stated ambition of a balanced budget by the mid-2020s.

But such an outcome cannot be hailed as “job done” for the simple reason that the UK government is still deeply in debt by peacetime standards. The total of government debt still stands at £1.74 trillion or 84 per cent of GDP. And looking ahead, the picture is far from reassuring. On unchanged policies, this debt total is scheduled to fall only gently over the next few years. And from the 2030s the debt total is set to explode again as health, welfare and pension spending escalates sharply. The OBR assumes that these unavoidable extra calls will push debt to 150 per cent of GDP by the early 2050s.

A scary figure – and a Conservative administration would be expected to drive on with debt and deficit reduction. But that is not always what Conservative administrations do. They are constantly at the mercy not only of fluctuations in the business cycle that can throw the public finances out of kilter, but also the relentless daily demands to ease up on “austerity” and accede to the spending pleas of its own ministers. Alarming though future projections of government debt may be, they are nowhere as scary as the immediate prospect of voter anger – and electoral defeat.

Such is the uncertainty over the Brexit negotiations, few dare to predict when the next UK election might be. But a hint in March of possible tax and spending relaxation in the autumn may be this government’s critical line of defence in the event of a Commons defeat and the prospect of a close election battle against Labour. Hammond has never given the appearance of being a zero deficit ideologue. And the opportunity to shine as “the people’s chancellor” by offering the prospect of income tax reduction at such a febrile time for the Conservative Party leadership could prove an irresistible temptation.

Such a prospect, of course, would be unsettling for the minority SNP administration at Holyrood, dependent as it is on support from the tax-rise-favouring Greens. Last week’s budget deal saw the Greens’ six MSPs support the budget in return for a package, the most controversial item of which was a new five-band tax system, effective from 1 April. It ushers in a 41p higher rate threshold starting at £43,431 rather than the £44,274 originally proposed by Finance Secretary Derek Mackay. It will be levied on incomes from £43,431 to £150,000. And an additional rate of 46p will apply to incomes from £150,000.

The changes already in the pipeline mean that someone earning £45,000 will pay £42 a month more and someone earning £150,000 will pay £161 a month more. Around 30 per cent of Scots taxpayers will pay more than they did last year – and 45 per cent will be paying more than they would if they lived south of the border.

The debate saw the emergence of doubts as to whether these tax increases would, after costs, raise revenue sufficiently to meet the many spending ambitions of the administration. Labour and the Liberal Democrats argued that the tax changes do not go far enough. Labour, mounting a challenge from the left, is likely to urge further tax increases which the SNP might find itself compelled to meet with further tax rises of its own.

For the moment there seems to be little recognition of the behavioural consequences: how higher-earning taxpayers might react, particularly those who work in the financial sector who are required to spend some time in England. Switching tax domicile out of Scotland may prove a tempting option, while employers may create remuneration packages which convert an element of pay into savings or dividend income where (lower) rates and levels are reserved to the UK.

The worry, of course, is that the loss of revenue through behavioural change is not recognised until it has actually occurred – and when it is too late. But it would be a watershed moment of its own for Scotland.