The true test of the Budget

British politics has not lost its flair for the dramatic. If it was not enough to have Sajid Javid resign as -chancellor less than a month before the -Budget, Wednesday’s statement was delivered against the backdrop of a global economic crisis. Coronavirus is causing a shock to both demand and supply. We have not had a crisis like this in decades, and there is no obvious immediate solution for national or -global policy-makers.

The £30 billion of emergency measures the new Chancellor, Rishi Sunak, announced in the Budget are not the last set of actions we will see in response to coronavirus. The government is still waiting to see how the situation develops, and how severe the economic and societal disruption will be. It must, though, be remembered how difficult temporary changes are to reverse once introduced. If the state ends up as the effective employer of everyone in the gig economy during this crisis, it will be very difficult to go back.

Dealing with the coronavirus is a huge test for the government. A good response isn’t going to win the next election, but a bad one could lose it. At the end of the crisis, voters must be left with a sense that the government is competent. If not, the public will conclude that the Tories aren’t going to be capable of handling other issues either.

What will determine if the Tories do win the next election is whether they are perceived to have succeeded in their ambitions to ‘level up’ the country. The party’s 80-seat majority is a result of the gains they made in the north, the Midlands and Wales. If those places don’t think the Tories are delivering, Boris Johnson will be out of office in 2024.

‘Levelling up’ is a vague phrase. Many Tories are reluctant to define it precisely. Sunak talks about it as a means to ensure that where you’re born doesn’t determine your life chances. In other words, creating greater equality of opportunity.

One of the challenges for the government is that it will take a generation before we will know if many of its reforms have succeeded. It won’t be possible to say in 2024 if a kid born in the Don Valley has the same chances in life as one born in the Thames Valley. This is why the government is keen to show that it is delivering on the party’s manifesto commitments. It believes that if it can demonstrate it is sticking to its promises, then voters will give it more time to deliver on the more complex parts of its agenda.

There is, though, a simple test for the levelling-up plan: by the end of this parliament, is there significantly increased private sector investment in these places? In this Budget, the government spent the seed capital designed to make these overlooked areas more attractive to live, work and invest in. But if that doesn’t succeed in bringing in commercial businesses, then it will be unsustainable. As Northern Ireland so painfully demonstrates, higher levels of state spending per head are no guarantee of prosperity.

Some Tories reach to defend their wallets whenever ‘levelling up’ is mentioned. They fear that the government’s agenda will just turn into an excuse to tax London and the south-east more to pump extra money into the north. But this Budget addressed two significant problems. First, the Treasury’s so-called green book rules, which determined which infrastructure projects were funded, had the perverse effect of ensuring that the more productive areas of the UK received more investment while the less productive areas got left behind. This isn’t good for national cohesion. Eventually the old economic model — based around the Thatcher/Blair settlement and EU membership — lost public support. The hope is that a shift to a ‘minimum service guarantee’ approach to infrastructure will not only boost productivity in those left behind regions but also maintain public support for the system. Second, there is a clear role for the state in providing the infrastructure necessary for private business to thrive. No one can seriously think that Canary Wharf would have been as successful without the Docklands Light Railway and the Jubilee Line extension.

This Budget also offered reassurance on the question of how this was to be paid for. The fact there was no mansion tax was a welcome sign that the idea of hitting the south, where property prices are higher, to fund extra spending in the north has been dropped. The tax system, obviously, redistributes money geographically. But the symbolism of this move would have made levelling up look like it was being done by taking from the south to give to the north when the whole point of the exercise is to make the entire country more prosperous.

Whether this plan is sustainable or not will depend on whether the private sector follows. Any attempt to level up simply through greater public spending, moving government agencies north and the like, is destined to fail. There will always be periods of retrenchment in the public finances and in those times, these kind of projects will be the first to go.

What the government needs to do is put in place the physical and digital infrastructure which allows these regions to become good for business and then combine that with tax and regulatory changes designed to encourage the private sector to go there. Sunak is a proponent of freeports, which would allow companies to import parts and manufacture goods in a place without paying customs duties. He is also an advocate of ‘opportunity zones’, areas where investors are offered tax advantages to get private sector capital flowing into them. As Chancellor, he must ensure that these policies are delivered — and quickly.

The test of this government is whether it develops a new Tory approach to the economy, one that is prepared to have the state invest to create the conditions for growth but also knows how to get private sector capital into the places that need it most. Combine this approach with the government’s increase in the research budget to £22 billion, and you can see how growth could be fostered far outside London and the south-east. But if this growth is to be sustainable, it must be led by the private sector.