Every budget is billed in advance as the most crucial in recent times, but then most are instantly forgotten. The one Rishi Sunak will deliver in just over two weeks’ time may be one of the few that justifies the hype.
The reason so much is resting on the shoulders of the tyro chancellor is that the budget needs to satisfy a number of different audiences: the voters in the Midlands and the north of England who gave Boris Johnson his 80-seat majority; traditional Conservative voters; the financial markets; and foreign governments looking to see whether the UK will take a lead before the Cop26 climate change conference in Glasgow in November.
A package that pushes all the necessary buttons is not going to be easy. To take one example, making tax relief on pension contributions less generous for those on higher incomes would help the chancellor’s sums add up and win credibility with the financial markets but antagonise the Tory party’s natural supporters.
Sunak’s immediate task is to announce targets for the public finances that are easier to hit than the ones currently in place, but not so weak that the markets take fright.
Moving the goalposts will give the government more scope to borrow for infrastructure projects that need to be underway soon if they are to be completed in time to deliver a political dividend for Johnson at the next general election.
But unless he can also find a way of making the budget consistent with the government’s 2050 net zero carbon target for the economy a diplomatic failure of catastrophic proportions looms at the end of the year.
The Cop26 is the most important summit the UK has hosted since the G8 met at Gleneagles in 2005 – and the task facing the government is much more daunting than it was then.
The Gleneagles summit was all about the rich countries of the west agreeing to provide debt relief and higher levels of aid for poor nations. Most of the debts would never have been paid anyway and the doubling of aid was easily affordable at a time when the global economy was booming.
Even so, it took a lot of time and effort to chisel out a deal. The then prime minister, Tony Blair, and the then chancellor, Gordon Brown, both lobbied hard to overcome resistance to their plan, expending plenty of political capital in the process. Public opinion – channeled through the Make Poverty History campaign – was effectively mobilised. Crucially, the Labour government showed leadership by committing to the UN target to spend 0.7% of national income on aid.
A deal in Glasgow is going to be immensely more difficult than it was up the road in Perthshire 15 years ago. For a start, there are many more countries involved. For another, some of the biggest players are actively hostile to the idea of setting tougher emissions targets. The contrast between George W Bush – who was interested in Africa – and the climate emergency denier who currently occupies the White House is stark. But the US is not going to be alone in Glasgow: Brazil, Australia and Saudi Arabia will all prove hard to break down.
After failing to persuade David Cameron to do the job, Johnson has put the business secretary, Alok Sharma, in charge of summit preparations. But Sharma does not have the heavy-hitting international reputation that is going to impress other governments. That will require Johnson to demonstrate his personal commitment to making Glasgow a success.
All of which brings us back to the budget, which provides an opportunity for the government to announce measures that will accelerate the UK’s progress towards a decarbonised economy. These need to be more than the mooted increase in fuel duty.
The Green New Deal Group (of which I am a member) has estimated it will cost about £100bn a year for 20 years to make the transition to a net zero carbon economy. Investment on that sort of scale would be necessary to make the UK’s 30m buildings energy efficient, turn buildings into power stations through the use of solar panels, and invest in renewable energy.
So where’s the money going to come from? One answer would be a form of green quantitative easing – money creation by the Bank of England that would pay for the decarbonisation of the economy rather than, as was the case during and after the financial crisis, being pumped into the banking system. The government doesn’t seem keen on this approach, even though there are plenty of economists who think it is wholly feasible.
Another possibility would be for the government to borrow the money in the usual way, but this doesn’t appeal to ministers either.
There is, though, a third option. At present about £100bn year is paid into pension schemes, all of it eligible for tax relief currently worth £54bn a year. There is also tax relief on the £70bn a year invested in Isas. The GND proposal is that 25% of pension contributions should go into green new deal investment in exchange for that tax relief and that all new Isa contributions – which currently go into cash or shares – should be invested in green new deal bonds issued by the government at a guaranteed rate of interest.
The idea is to provide a stream of income to transform the economy as well as offering a new secure investment vehicle for savers. Insurance companies and pension funds no longer risk being left with stranded fossil fuel assets and the City would be the place to do green finance. Above all, a strong signal of intent would be sent to the rest of the world.