Far from being big and revolutionary, this Budget was small and stubborn

Part of the reason for the Chancellor’s reticence to expand capital expenditure is that he is hemmed in by his self-imposed fiscal mandate

Philip Hammond said his Budget would revive the ‘home-owning dream in Britain’ (PA)

“This Budget has got to be big, it’s got to be powerful, it’s got to be revolutionary.” That was the view of an anonymous “senior Government source” quoted in last Sunday’s papers.

It seems likely that the person, whoever it was, was trying to set Philip Hammond up for a fall given that the last time “Spreadsheet Phil” tried to be a little daring in March, by raising national insurance on the self-employed, his Budget unravelled in weeks.

But the sentiment voiced wasn’t entirely wrong. The country really does need a bold new approach to government taxation and spending in order to help deliver a more equitable and productive British economy. Public services really are under severe strain after years of cuts and urgently need relief. And polls show that most people are willing to bear tax increases to pay for that relief.

So how did Hammond’s effort on Wednesday measure up? Did it meet the economic and social challenges facing the country?

Alas, it did not. First, it’s worth giving credit to Hammond for what he didn’t get wrong. He has loosened fiscal policy somewhat over the next few years. This is entirely sensible given the slowdown we are already experiencing due to Brexit.

The last thing the economy needs is major government spending cuts subtracting from what meagre demand there is. The additional few billion of funds for the NHS over the next couple of years is necessary (although still plainly not enough to cover rising demand).

Yet on the big structural problems facing the country, such as expensive housing and low productivity, Hammond delivered little more than tinkering, some of it counterproductive.

Reducing stamp duty for first-time buyers is clearly no solution to what even the Conservatives now concede is a housing “crisis”. It will not help build more houses in places where they would do some good. And even those lucky people who benefit from the cut will, if the Office for Budget Responsibility’s estimates are correct, see a chunk of their financial gain offset by an increase in house prices in response to the tax break.

There was not a hint of the kind of tax reform that the property market is crying out for – a progressive, regular levy on homes based on their market value. A revolutionary Chancellor would have put us on this road, or at the very least raised it as a possibility.

The fresh state expenditure on infrastructure announced by Hammond to facilitate more home construction is pretty underwhelming in the scheme of things – certainly falling well short of the sort of sums the Communities Secretary Sajid Javid was, rightly, lobbying for. One has to be extremely optimistic (or naïve) to see anything in this Budget that will deliver the 300,000 net new homes a year that Hammond promises.

A wider lack of ambition on infrastructure can be seen in the aggregate figures for public sector net investment. Today this stands at 2 per cent of GDP, which is lacklustre relative to our peer economies in Europe. By the end of the forecast period it is still projected by the OBR to creep up to just 2.3 per cent, essentially unchanged from March.

Part of the reason for the Chancellor’s reticence on expanding capital expenditure is that he is hemmed in by his self-imposed fiscal mandate, which makes no allowance for this form of state investment spending. Most public finance experts agree that it’s foolish not to carve investment out from fiscal targets because this can bias politicians against spending on capital projects even when they will enhance the productive capacity of the economy, whether that is road widening, or rail electrification.

Sticking to a badly designed fiscal rule is not wise. It doesn’t build fiscal “credibility” in financial markets. It’s simply stubborn. This Budget was no disaster. But it was small and stubborn.