Although intended as an insult, the chancellor should own his nickname “spreadsheet Phil”. Far from indicating a boring focus on details, the best publicly available spreadsheets are more elegant than the prose of political philosophers, tell a more compelling narrative than spin-doctors and provoke more rigorous thought than most economic models. Best for Philip Hammond, their use can guide the Treasury to a prudent and successful Budget next week.
Diving into the “low level aggregates” spreadsheet from the Office for National Statistics, the chancellor should worry about the dependence of the UK economy on the retail sector since the EU referendum. It accounted for a quarter of growth, more than double its normal weight in the economy. This cannot last.
Spending quality time with the Office for Budget Responsibility’s wonderful forecasting errors worksheet reveals the extent to which the fiscal watchdog has repeatedly erred in expecting a productivity rebound starting in the following year. This information should make the chancellor cautious about this crucial OBR judgment when it appears again next week.
The government spreadsheets underpinning the Institute for Government’s public sector performance tracker are all you need to conclude that across Whitehall, public sector fat has been trimmed and additional spending restraint is now cutting into the bones of public services. The Budget judgment is easy to predict when you add to this information data on tax receipts showing revenues are higher this financial year than expected in the Autumn Statement, but close to the predictions of the Budget last March. With huge uncertainties over the outlook, the chancellor will bank most of the improvement in the public finances compared with last November, but use some of the windfall to relieve pressure in the most troubled part of the public sector – social care.
Since Mr Hammond wants to leave big tax reform until his Autumn Budget, he can nevertheless use the evidence of strain in public services to prepare voters for paying higher taxes in future. Naturally this is difficult. The Conservative government was elected on a promise not to raise income tax, national insurance or VAT rates, but if it can ditch a manifesto promise to keep Britain in the EU single market, it can also think again about how best to fund public services.
Spreadsheets underpinning the OBR’s long-term fiscal sustainability report help by highlighting the urgency of the task. Even if Mr Hammond stays in post and gets the deficit down to sustainable levels as planned by 2021-22, this will be exactly the moment new spending pressures hit the exchequer in healthcare and pensions as a result of population ageing.
By luck, Britain has faced few ageing pressures when it has sought to repair the damage to the public finances wrought by the 2008-09 financial crisis this decade. That changes in the 2020s, when increased numbers of older people will raise the share of public spending in national income by 1 percentage point. If the chancellor wants to avoid borrowing more, it implies about £18bn a year of tax increases, about 3 percentage points on the basic rate of income tax. And the pressures in the next parliament will intensify during the rest of the 2020s and the 2030s. If he lives up to his nickname, Mr Hammond will know all of this. He will understand that this Budget requires a mix of caution on the immediate outlook and a willingness to prepare Britain in the longer term either for significantly higher taxation or for a serious debate about the boundaries of state provision. The political test will be whether he is willing to tell people the harsh truth.