The Budget – Key Points
A Budget of two halves
It’s a cliché, but one that can’t be avoided. In the second half of his Budget, the new Chancellor – who cut an extremely impressive figure at the Despatch Box – set out a relatively normal fiscal statement, if one that was heavier on the spending and borrowing than we’ve seen for a few years. But it followed an opening section that made it clear that the Government sees the coronavirus epidemic as an economic threat on a similar scale to the 2008 financial crisis – with a stimulus package of roughly the same size as that originally set out by Alistair Darling.
Competence on coronavirus
On Monday, the Centre for Policy Studies called for the Chancellor to prioritise support for employees and small businesses in order to limit the economic damage from the outbreak, by preventing firms going under and people losing their jobs through no fault of their own.
Rishi Sunak, as we suggested, focused on issues such as credit supply and business rates – but on an even bigger scale. The £30 billion stimulus package was made up of £5 billion for the NHS, £7 billion to support business, and £18 billion in wider tax cuts and fiscal easing. This comes alongside Bank of England announcements of a cut in interest rates cut to just 0.25% and a £100 billion lending facility for businesses.
Taken together, these show that the Government is determined to ensure that the economic hit from the coronavirus – which it acknowledges is inevitable – does not turn into a pulverising blow. The new Chancellor is definitely doing all the right things – we can only hope that a combination of public health measures and warmer weather ensure that he doesn’t need all of the ammunition he has provided himself with.
Normal service to be resumed
The central assumption of the Budget – and one which lay behind the spending announcements in its second half – is that the damage from coronavirus will only be temporary. If not, the fiscal picture could change significantly. It was noteworthy that the Office for Budget Responsibility was not able to incorporate the coronavirus response into its figures, precisely because the situation is changing so rapidly.
Wins for the Centre for Policy Studies
It was great to see the Chancellor backing ideas put forward or endorsed by the Centre for Policy Studies. These included:
The new Chancellor also argued strongly for enterprise to be at the heart of the UK economy, and energetically made the case that tax is a cost of living issue, not just by cutting National Insurance and freezing a series of duties, including fuel duty.
Deficit reduction is dead
Even before the impact of the coronavirus, debt as a share of GDP was set to effectively plateau in the coming years at around 75% of GDP, with the budget deficit hovering at around 2-3% of GDP. State spending as a percentage of GDP is set to run at approximately 40%, as opposed to the 35% targeted by George Osborne.
This is not Corbynism in disguise – but it is a higher-spending and higher-borrowing incarnation of Conservatism than seen under Boris Johnson’s predecessors. That is reflected by the fact that the tax burden is set to remain higher than we at the CPS would prefer, at a projected 34.6% of GDP by the end of the Parliament.
The Government needs to get growth going
The Budget projects that public spending will rise roughly twice as fast as economic growth. This is, over the long term, not sustainable.
As we have been highlighting in our ‘Going for Growth’ lecture series, the long-term decline in GDP growth remains the UK’s biggest economic challenge. In the 2010s, GDP was growing at roughly 2% a year. But looking forward, the UK’s annual growth rate is forecast to be averaging less than 1.5% in coming years – even before the impact of coronavirus.
The Government plans to address this with a sharp rise in public sector net investment. The aim is to focus on the kind of pro-growth investments that improve Britain’s productivity, especially in the regions.
Yet if the Government really wants to increase growth, it needs to take bold action on tax, regulation and planning – as well as supporting business, enterprise and wealth creation. It also needs to make sure that it is investing wisely, and that it scrutinises existing state spending with the beadiest of eyes.
Not coincidentally, the CPS will be setting out big plans in many of these areas in the coming months…