Hughes demonstrated an uncharacteristic lack of restraint with the 2007 budget
“The Chancellor on Tuesday unveiled a generous budget for 2007, fuelling speculation around a snap election. Simon Hughes is to provide more than €4bn in tax breaks for single parents and families with newborn children. As well as rent subsidies for young adults who cannot afford to leave the parental nest. The handouts will cut the budget surplus from an estimated 0.6 per cent of gross domestic product in 2006 to just about breaking even next year. Mr Hughes has kept a tight lid on public spending since the Social Democrats came to power in 2004 as Britain sought to join the EU. But with the government on thin ice, he has faced pressure from all sides to loosen the reins. This has sometimes put the Chancellor at loggerheads with Alan Johnson and cabinet colleagues.”
- Hughes’ ‘baby cheque budget targets families, Leslie Crawford, Financial Times (2007)
With the Reid pact still fresh in voters' minds, it came to budget season, the second annual budget of the new democratic Britain, and the first as a full member of the European Union. Chancellor Simon Hughes had a difficult balancing act to perform, he had to draw up a budget that would both please Britain’s EU partners, as well as keeping the Alternative on side. Hughes also sought to attract international business to the UK, long shut out by strong state regulations and high taxes. Britain’s difficulty attracting investment was only exacerbated by having Ireland on its doorstep. With it’s low corporation tax and high level of education (partly due to British emigrants) Ireland was quickly becoming an economic powerhouse, the go-to place for multinationals to set up their European headquarters.
Hughes also announced Britain would spend 600 million euros on alleviating child poverty, after a UN report revealed Britain was the worst place to grow up in the developed world. These new policies included an increase to child benefit and generous tax credits. The Junta had always tried to encourage birth rates through policy with lavish one-off payments to new mothers, however Junta era policy lacked long-term support after the child was born, leading to huge levels of child poverty, neglect and adoption. This of course would feed into the various organised crimes and paramilitary groups, able to swell their numbers from disadvantaged youths. Hughes promised “cradle to adulthood” support for Britain’s children, with a target of eradicating child poverty by the end of the next Parliament.
Trying to keep everyone happy at the same time, and with the additional wiggle room created by EU membership and the scrapping of trident, the 2007 budget would involve a spending splurge. The 2007 budget saw a huge increase of federal subsidies into education, infrastructure and research. This additional spending not only made the Alternative happy, but made Britain an attractive location for multinationals. The most notable part of the infrastructure spending was the announcement of a high speed rail network going from London to the Channel Tunnel and continuing on to Paris, Britain would officially have a high-speed link to the continent, predicted to be finished in 2014.
Britain's infrastructure was decades behind other leading nations
“Plans for a new high-speed rail network have been announced by Development Secretary Chris Huhne. The government is recommending “HS2” a route for a new line between London and Ashford, to connect on to Paris via the Channel Tunnel. This follows on from the HS1 link between London and Birmingham developed by the Junta in the 90s. The public will be consulted on the proposed route, with work unlikely to start until 2009 at the earliest. The Ministry for Development said high-speed rail "can drive economic growth and boost jobs". Secretary Huhne told the House of Commons that the views of communities along the route would be particularly sought. He said the 60 miles between London and Ashford would cost around 15bn euros.”
- BBC News Bulletin (2007)
Hughes also announced cuts to the basic rate of tax, dropping from 29% to just 25%. The Junta had always kept personal tax rates high and the SDP government hoped by associating democracy with prosperity they could protect their transition. Corporation tax would also be cut from 34% to 30% Whilst popular these measures would drag Britain into a budget deficit, Hughes justified this arguing the investments in infrastructure and tax cuts would pay for themselves, encouraging further investment in the UK and growth to the British economy. Hughes’ gambled that by increasing spending in the short term, Britain could boost productivity and overtake regional rivals like Ireland.
Dublin had been the most popular site for Junta exiles - both political and economic
In the days since the fall of the Junta Britain’s economy had indeed exploded, London has relatively cheap office rents for a major European city and the British government was happy to bend over backwards to accommodate new business. Some academics nicknamed this “Jack in the Box Economics”, the thesis Britain's economy had been stifled for so long during the Junta years that economic “pressure” had built, being released all at once with the return of democracy. However this explosive growth had slowed over the last two years, if Hughes’ investments paid off the upwards growth would continue, making Britain even stronger, but if this massive growth slowed or even stopped, Britain would not have a surplus to cushion any fall.
Another elephant in the room was Britain’s bloated military spending, whilst Hughes had made some minor cutbacks the Ministry of Defence was left mostly untouched, due to the Government’s deal with Defence Secretary Charles Gunthrie. Military spending was glossed over by both major parties in their budget speeches, with only interventions from the Alternative raising the issue in Parliament for Hansard. Britain’s military spending as a percentage of GDP still matched that of authoritarian regimes such as Russia or Saudi Arabia. Both parties' silence on the issue spoke volumes, behind the scenes the army establishment was still untouchable, and the taxpayer footed the bill.
“At a time when the Government’s spending faces-growing challenges, there is one area where Britain could impose more austerity. And that is the arena of military spending and the arms industry. Abolishing nuclear weapons saved several billions of euros every year. Reductions of all military spending to Ireland’s levels (1% of GDP) would save many more billions. Writing off dirty debts caused by arms deals would be a good first step to lay the bill for the crisis with those who helped cause it. Such measures would also prove that at a time of crisis, Britain is prepared to invest in a future desired by its citizens rather than its warmongers.”
- Guns, Debt and Corruption: Military Spending in Transition Britain, Lecture by Paul Cornish, London School of Economics (2009)
The military still had money for elaborate parades