UK Government Budget Briefing – big choices made, and avoided

UK Government Budget Briefing – big choices made, and avoided

11th March 2020

UK Government Budget Briefing

  1. Background

This is a highly unusual budget in a number of ways. No other budget in modern times has been presented against a backdrop so uncertain as that created by the Covid-19 viral outbreak, and the economic consequences of our departure from the EU. No other budget in modern times has been presented with so much expectation about the measures contained within it, and such a radical change in the government’s priorities as set out in a recent election. 

And there can be few budgets that have been assembled and presented by such an inexperienced Chancellor of the Exchequer – Rishi Sunak having joined the Government only six months ago, and having been appointed to his current role after the very public and extraordinary disagreement between the Prime Minister and his former Chancellor, Sajid Javid.

This is a budget which needs to work for the economy to successfully withstand the coronavirus threat, and one which will be the focus of intense scrutiny by other world leaders as the UK sets out on a journey into the unknown after the EU transitional arrangements conclude at the end of this year.

This is arguably the most significant budget announcement since the financial crash over a decade ago.

  1. The proposals

Coronavirus

  • £5bn to support the NHS and social care systems through the pandemic
  • Changes to Sick Pay to ensure everyone is able to access support when self-isolating, and ensuring small firms bear no cost at all through sickness absence
  • A £500m fund to support vulnerable people
  • “Business interruption” loan fund for small firms, who can claim up to £1.2m
  • Business rates abolished for firms in the retail, leisure and hospitality sectors with a rateable value below £51,000

Taxes

  • No changes to income or corporate taxes, and fuel duty frozen again
  • Duties on spirits, beer, cider and wine to be frozen
  • VAT abolished on sanitary products
  • Entrepreneurs’ relief capped at £1m instead of £10m

Economy

  • Economy predicted to grow 1.1% this year
  • Annual output forecast to be 1.8% in 2021-22, 1.5% in 2022-23 and 1.3% in 2023-24
  • Inflation forecast of 1.4% this year, increasing to 1.8% in 2021-2022

Environment

  • Plastic packaging tax to come into force from April 2022
  • Manufacturers and importers whose products have less than 30% recyclable material will be charged £200 per tonne
  • Fuel subsidies for off-road vehicles – known as red diesel – will be scrapped “for most sectors” in two years’ time
  • £120m in emergency relief for communities affected by this winter’s flooding and £200m for flood resilience
  • Total investment in flood defences to be doubled to £5.2bn over next five years
  • £640m “nature for climate fund” to protect natural habitats, including 30,000 hectares of new trees

Infrastructure

  • More than £600bn is set to be spent on roads, rail, broadband and housing by the middle of 2025
  • £2.5bn will be made available to fix potholes and resurface roads over five years
  • Public sector net borrowing set to rise this year to 2.1% of GDP, rising to 2.4% and 2.8% in later years
  1. Analysis

Radical change

Rishi Sunak has broken conventional wisdom in his statement today. In two remarkable ways, he has sought to redefine UK political debate.

Firstly, hearing a Conservative chancellor announce from the despatch box that the Government seeks actively to redefine the economic geography of the country is a striking statement. They want to provide an economic dividend to those former “red wall” constituencies that were won in December’s general election, and provided the basis for the Johnson government’s significant parliamentary majority.

Concern will remain that more time will be needed to deliver on the rhetorical promises to the North than would be ideal given the political election cycle. Delivering change in the North before the next election in 2024 will inevitably need to focus on rhetoric, promise and announcements, rather than cutting many ribbons on infrastructure projects delivered.

Nevertheless, the scale of infrastructure investment is inarguably hugely significant –  £175bn more over the next five years than was anticipated before the last election, a sum equivalent to four times the original cost of the HS2 programme. Delivering that level of capital spend will not be easy – capital projects are notoriously easy to announce and difficult to get underway and complete on time. The scale of this programme poses a real challenge, not least given the assumption that the supply of construction labour from the EU is set to dry up at the end of this year. The OBR assumption of an increase in employment of 500k by 2025 is likely to be very sensitive to the ability of our infrastructure and planning system to swiftly approve projects. Recent experience of HS2 and Heathrow expansion are a warning that delivery will not be easy.

Secondly, the Conservatives have traditionally sought to position themselves as fiscally responsible, and determined to bring national debt down as a percentage of GDP. This budget statement changes that assumption, with a very significant increase in the national overdraft. The deficit will rise as a percentage of GDP as a result of measures announced today, even before reaping the full impact of the viral outbreak. The OBR now confirms that the UK will no longer meet its stated ambition to run a balanced budget by the middle of the decade, and has abandoned its stated intention for the coming financial year to run a structural deficit of below 2%. The abandonment of these targets, even before viral impact, is hugely significant.

There is already some concern on the Conservative back benches at the scale of that change, whilst the real test will inevitably be on the financial markets in the coming days and weeks. So far, this has largely been a spend/spend budget, with the sources of the funding for spending commitments inevitably less clear. 

Choices

Rishi Sunak did have to make choices in this budget. 

He chose a mammoth increase in public sector infrastructure investment over increasing departmental budgets, other than in health. He chose capital spending, at a time of low interest rates, over current spending. That left some very significant questions unanswered. Absolutely no mention of the long-awaited proposal to address the most significant public policy challenge in the UK – the rapidly rising cost of social care, and the financial consequences flowing from it. That failure will be of concern to many, not least those who see spending as a percentage of GDP on the rise, even before tackling social care. That holds the potential to close off some of the options that might flow from a review – meaning eventual solutions may have to be more self-funded. This is a massive challenge for this Government, on which it has not started serious thinking.

He made choices on the environment that left some big decisions untaken. It was perhaps politically unsurprising, but the continuing failure to recommence fuel tax rises  is indicative of a wider failure to will the end on climate change without, arguably, willing the means. He chose populism in many areas, rather than announce practical measures to accelerate the nation’s journey to net zero emissions in 2050, much less announce any acceleration in that process. He chose up-front support to mitigate the coronavirus threat, rather than announce more strategic changes in the way the UK is governed.

This budget breaks conventional norms in a number of ways: it stretches the spending envelope in a way that breaks conventional Conservative thinking on debt reduction. 

This was a budget which was greeted with enthusiasm by some – welcoming it as a budget which (according to the OBR) represents the formal end to austerity. For others, it was a missed opportunity to genuinely invest in the delivery of public services.

Scotland

In the light of the coronavirus outbreak, most Scottish Government attention will be on working closely with the UK Government to contain and mitigate its impacts. The mitigating measures announced by Sunak are largely in reserved areas, but some are devolved and will require Scottish Government decisions on whether to replicate in Scotland. In particular, there will be substantial sums coming north as a result of the Barnett formula – including on NHS spending and decisions on rates relief. The increase to the Scottish Government revenue budget will exceed £600m, over and above previous Barnett consequentials already announced, making available significant sums to SNP ministers.

The Scottish Government will be relieved that there have been no tax reductions, which would have forced them to follow suit, given that there is an emerging view that divergence between UK and Scottish tax rates may have peaked. They will also be alive to the consequences of the UK’s promised fundamental review of business rates, and perhaps see that as an opportunity to set in train their own review, seeking to take the lead on new measures to protect high streets. 

Finally, on infrastructure investment, the Scottish Government will be sensitive to the likely trend of increasing UK Government deployment of those new resources directly into the Scottish economy. The Scottish Secretary will be looking to place UK fingerprints on much of the new capital availability in Scotland, as both sides sharpen their arguments in the run up to Scottish Parliamentary elections in only 14 months’ time.

Summary

This was the budget when everything changed. With a coming slowdown in economic activity, the UK Government is betting the house on a massive spending plan to mitigate impact, change political optics and change the UK’s economic geography. Whether they do so will largely determine the political backdrop for the next decade.

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