The Chancellor’s Stop-Gap Budget
The Chancellor’s Budget on Wednesday set out a broadly positive economic roadmap for recovery, but many important policies were missing.
A little over a week after the Prime Minister laid out the roadmap for unlocking after the third, and hopefully final, lockdown, the Chancellor was tasked on Wednesday with delivering a budget that delivered on three main aims for the government:
- continuing the economic support associated with the lockdown restrictions
- supporting the recovery from the pandemic with fiscal stimulus and keeping taxes low
- setting out a plan to deal with the debt accrued during the pandemic
Last March, Rishi Sunak announced the furlough scheme, the uplift in Universal Credit, loan schemes for businesses, along with funding for coronavirus testing, PPE procurement, and vaccine development — and much more besides. This financial package was huge, and not a decision taken lightly by the Treasury. Despite that, these decisions were straightforward and politically popular.
This March, the government’s conflicting economic aims, along with the many subplots created by the now woefully out-of-date 2019 Conservative manifesto promises, created a near-impossible situation for the Chancellor.
A year is a long time in politics — and an even longer time in a pandemic.
It was the first real test of the relatively new Chancellor’s political skill and dexterity. On the face of it, it’s one that he has passed comfortably.
46% of UK adults approved of the measures in the budget, while just 11% opposed them. A strong plurality of members from all three of the Conservatives, Liberal Democrats, and Labour party supported the measures, suggesting both that the budget is popular and that the public is still in a forgiving mood, given the ongoing lockdown and pandemic effects.
It’s easy to see why the budget is popular, as well. The measures it contains are broad-base policies, economically sensible and proportionate. The Chancellor began with the quite troubling data on the nation’s economic performance: after a 10% GDP slump last year, the economy will not reach pre-Covid levels until mid-2022, despite the provisionally-slated end of legal limits on social contact on June 21st.
The pandemic, once related measures in this budget are taken into account, will have cost over £400bn in total, with around 60% of that cost coming from government policy, while 40% has come from lost revenue. Debt is now at its highest level as a percentage of GDP since 1958, and the debt taken on over the past year is comparable only to the two world wars.
Against this backdrop, the Chancellor set out first the continuation of pandemic support: the furlough scheme, Universal Credit uplift, and the self-employment support grants all extended until September. The easiest part of the job: done. But, for the three million people excluded from support throughout the pandemic, this continuation has added insult to injury. With four more months of restrictions still facing the country, these three million face four more months of real hardship. The Universal Credit uplift might be their only lifeline.
There were extra measures announced for supporting the longer-term economic recovery, the government’s second budget objective. Businesses will be allowed greater accounting freedom in the years to come, able to deduct current losses from future profits to reduce the tax burden on an ailing private sector. The Kickstart scheme to fund training and apprenticeships for young people was given a boost, while a green infrastructure investment bank, with £12bn initial capital, was a rather significant nod to the government’s promise to reach net-zero carbon emissions by 2050. There will also be greater tax leeway for businesses when they invest profits, helping to drive what the Chancellor labelled an “investment-led” recovery.
Alcohol duty and fuel duty were also frozen, to give people and businesses a further reprieve. The fuel duty freeze now enters its 10th year, though. Sooner or later, it will have to give.
But there would always have to be difficult choices and trade-offs between supporting the recovery and raising revenue. The Chancellor seems to have gone for the general approach of growing out of the high debt burden, which may be a solid approach given the historically-low interest rates.
Income tax, VAT, and business rates will not rise. The tax band thresholds, including the personal allowance, will be frozen, prompting significant concern that the lowest earners, already hard-hit by the pandemic, will bear the brunt of the fiscal consolidation. However, these freezes will not come in until the next tax year, granting a momentary reprieve. The Chancellor’s acknowledgement that this freeze was indeed a real-terms cut was a refreshing display of honesty, but that will matter little to those impacted most severely by the freeze.
Corporation tax will be increased to 25% — a well-received measure — with the Chancellor promising that those with the broadest shoulders will bear the brunt of the pandemic bill. Again, though, this tax rise will be delayed, until 2023, with Sunak making clear the value of certainty and time to plan, an acknowledgement of the immense challenges of the last year to businesses.
Questions remain about the dangers of this strategy, given that any rise in interest rates could significantly increase the costs of servicing the huge debt accrued during the pandemic. But, on the whole, the budget delivered on the key objectives: supporting workers during the coming months, stimulating the recovery for the coming years, and setting out a skeletal plan for recouping the costs.
What is problematic about the budget is not what it does do, but what it doesn’t. Granted, the spending review and next year’s budget may be deemed more appropriate times to announce real detail in the plans for the rest of the Parliament, but a number of big problems have gone untreated. There was nothing to solve the housing shortage, nothing for the ailing aviation industry, nothing for local government, and nothing for the public sector. Huge sums will be needed to clear the court backlogs, deal with educational and health consequences of the pandemic in the short- and long-term, and train new teachers, healthcare workers, and social care workers.
Much of that funding is needed now. Catch-up schemes for children cannot wait until the spending review. Proper funding for “long covid” treatment is sorely needed. And, surely, we must start now, not in six months or a year, on training a new public sector workforce.
The government might be afforded some leeway on these matters, but to leave so many problems without solutions is a dangerous and damaging game to play. It is, nonetheless, a good budget on the whole, and a test passed pretty convincingly by the PM’s ever-popular right-hand-man.
For a man whose political star had begun to fade — widely blamed for lobbying against lockdown restrictions in the Autumn and practically anonymous in the winter — it is an important political win. For the country, cautious optimism is the order of the day.