It's increasingly clear that the Chancellor of the Exchequer is going through an identity crisis. In his Conservative party conference speech this Monday, he implored his party 'to be the builders'. This is certainly in keeping with his recent activity: a trip to China encouraging foreign investment in British infrastructure, the decision to 'unpause' work on Northern rail electrification, the announcement last week of Northern powerhouse mk 2 in Sheffield and a new National Infrastructure Commission, all point towards the Chancellor's desire to be seen as investing for the long term.
One thing stands in his way, however: the government's ambition to eliminate the deficit in this parliament. While now is the perfect time to be borrowing for public investment, given record-low long-term interest rates on government borrowing, the Chancellor has tied his hands in signing up to a fiscal charter requiring him to eliminate the deficit by 2019/20.
It's not just physical infrastructure that needs funding, it is investment in people and public services. While spending on large-scale capital projects is likely to be shielded from the deepest cuts, at the upcoming spending review the Chancellor needs to find a way to cut day-to-day spending by government outside health, defence, schools and international aid by 27 per cent. It will be tough to maintain the Chancellor's 'one nation' image when paring back on 16-19 education and adult skills as well as failing to invest early in preventative health and other services. The news that full devolution of business rates would be accompanied by the abolition of the main grant from central to local government illustrates the delicate fiscal manoeuvring required.
There is a way out. If the Chancellor is serious about both closing the deficit and having the fiscal wiggle-room to slow the pace of cuts, he can raise tax. It is telling that, unlike the most recent 2013 and 2010 spending rounds, this year's spending review will take place on the same day as the autumn statement. Without going into the minutiae, you cannot raise tax at a spending review, which focuses solely on distributing the overall spending envelope set out at the most recent budget between government departments. The Chancellor's decision to hold the autumn statement on the same day allows him to adjust the overall envelope through tax increases.
This is what we recommended in a recent report on the upcoming spending review. While we would go further and slow the pace of deficit reduction as a whole, at the very least we want to see £5bn raised through tax measures. The government's self-imposed and needless 'tax lock' prevents it from raising income tax, national insurance or VAT rates, but the Chancellor could choose to extend some of the measures announced in the Summer budget, such as a further rise in the insurance premium tax rate and an alignment of the higher rate of capital gains tax with the higher rate of dividend tax.
Pensions, in particular, could be a big money-spinner for the chancellor. The July budget announced a consultation on the tax treatment of pensions and floated the idea of moving from our current system of taxing pensions withdrawals to taxing pension contributions. While in economic terms this does not change the tax base of the economy, as it simply shifts receipts expected to be collected in the future forward to the present, it could provide a huge boost to the public finances in the short-term if implemented and is surely being considered by the Treasury.
The Chancellor can't have it all. As much as he likes to hang out in a hard-hat, cutting public services to their knees is not a good look. Up to now the burden of deficit reduction has fallen on some of the poorest in society, but he has had to start reaching into working tax credits to make savings, provoking the ire of leading members of his party and the Sun newspaper. To keep up the pace at the spending review will require cutting deeply into key public services, and may provoke a similar response from middle England. While tax rises are not a free lunch by any means, they do provide an opportunity for the Chancellor to ditch his 'axeman' image. He should take it.
Spencer Thompson is Senior Economic Analyst at IPPR