Dan Corry
On 22 February, prime minister Boris Johnson announced the ‘irreversible’ opening up roadmap out of lockdown.
The 2021 Budget was the time to see what support chancellor Rishi Sunak would give to it – and what he planned to do about the resulting fiscal position.
Updated economic forecasts from the Office for Budget Responsibility (OBR) helped him a bit.
The fiscal watchdog now predicts the economy will contract by a shade under 10% in 2020.
Despite the last forecast being in November – before the second lockdown had been announced – this figure is slightly less than the 11.3% they previously anticipated.
However, predicted growth of 4% in 2021 is down on the 5.5% central forecast made previously.
In November the OBR thought we would be back to pre-Covid-19 levels of output in the fourth quarter of 2022.
Its new projection is for us to get there a bit earlier by the middle of 2022.
But significantly, the OBR also feels we will remain 3% below where we would have been without Covid in five years' time.
Other, better news, was that borrowing this year will be £354bn (17% of GDP).
Although this is still an enormous figure, it is a fair bit lower than the £394bn thought most likely in November.
These forecasts of course reflect developments in the economy over recent months, especially the progress made on the vaccination.
But they also take account of the chancellor’s policy decisions.
These include the Budget’s e much-trailed decision – in effect the only decision he could really make – to extend many of the emergency Covid-19 measures – including furlough, business rate reliefs, lower VAT rate for pubs and restaurants and business loans.
He also at last extended the self-employment offer to some of those excluded from previous schemes.
In terms of new measures, there was the well briefed £5bn in Restart Grants, mainly for the retail and hospitality industry, and some pre-announced extra support for the very hard-hit culture sector.
But there was very little said about supporting extremely stretched government departments and especially addressing the acute suffering of local government.
Indeed, after taking out £10bn from public service spending relative to plans in the Autumn, it appears that another £4bn has now been removed.
The Budget was also surprisingly low in content on inequality, given the focus that Covid-19 has given to it – there was no permanent extension of the £20 uplift in Universal Credit and little else.
In contrast, the already booming housing market got more support in ways that are most likely just to further increase house prices.
The OBR news on unemployment was positive – a predicted peak of 6.5% is still a major concern, but lower than they previously thought.
Despite this, one might have expected to hear more on unemployment policy that just increasing the subsidy for apprentices.
‘Levelling up’ is a major plank of government policy.
There were all sorts of funds that may be useful but no news on the UK Shared Prosperity Fund (the EU funding replacement) and arguably too many pepper-potting schemes and announcements clearly aimed at rewarding Conservative votes in former ‘red wall’ seats.
Freeports got a good airing – even if the evidence that such approaches are cost effective is pretty scare.
In terms of dealing with the deficit and the debt, Sunak talked a lot about honesty and said that he will freeze tax thresholds from 2022 all the way to 2025-26 – bringing millions a higher tax bill than they otherwise would have had.
He also announced a very substantial increase in corporation tax for larger firms from 2023, “cushioned” by greatly increased allowances for investment (the so-called super-deduction) for the next two years.
While most economists would agree that waiting until we have a real full-on recovery before raising taxes is the right thing to do, there must be some scepticism that the ‘pain’ in the form of such tax rises will survive their brush with an election campaign in 2024.
Stepping back from the detail, it was hard not to feel the lure of the political cycle already starting to emerge in Sunak (and Johnson’s) mind.
Things have sort of gone into reverse compared to usual.
Normally you raise taxes and keep spending tight in the first few years so you can give out goodies nearer the election.
Covid-19 has forced a splurge - of sorts – now leading to a rising deficit and debt.
At this point the chancellor is bravely saying that he will put up taxes when the economy is stronger, trying among other things to keep the sound money dividing line with Labour that has worked so well for the Conservatives over the years.
Exactly how this may play out emerged in bits and pieces in this Budget.
We may need to wait to find out more of what the game plan is - maybe via another slick ‘brand Rishi’ video – at the next Budget in the Autumn.
