10 March 2020

Don’t panic – it’s only the Budget

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The forthcoming Budget will be a seat-of-the-pants affair. Former Chancellor Sajid Javid handed his successor, the suave Rishi Sunak, an extraordinarily difficult balancing act: somehow, Sunak has to deliver on the implied promises made to those who voted Tory for the first time in the December election, while still paying lip service to the Government’s fiscal rule. And now a nascent pandemic threatens to administer an almighty kicking to the UK economy, already weakened by Brexit uncertainty and a darkening international outlook.

But although the combination of Boris’s promises, the UK’s difficult relationship with the EU, and the coronavirus panic might look like a baptism of fire for a rookie Chancellor, it might give Sunak just the opportunity he needs to stamp his authority on this difficult role. He can afford to ditch austerity completely on the grounds that we are now in uncharted territory – indeed, he has the backing of George Osborne, the architect of austerity, for this move. And more importantly, he can cite TINA for whatever he chooses to do. “There Is No Alternative” is a great line for any Chancellor putting a Budget together in the middle of a panic.

So what should he do? Well, the first thing is to sort out his priorities. Which is most important right now – Boris, Brexit or the virus?

Clearly, Sunak has to keep his boss sweet. But it isn’t in the Prime Minister’s interests not to take the pandemic seriously. ‘Shock and awe’ measures to protect the economy may turn out to be unnecessary, but this is far better than doing little or nothing and getting kicked. And it also isn’t in his interests not to follow through on the promises he made to his new supporters. So Boris and the pandemic are, weirdly, convergent.

The outlier is Brexit. Right now, preparing for the economic impact of a possible no-deal end to the transition period on December 31 isn’t high on the priority list. People might even find it rather refreshing for the Budget not to be dominated by Brexit.

The Chancellor’s top priority must be the NHS. The pandemic is first and foremost a health crisis, and the NHS is nowhere near equipped to deal with it. It doesn’t even have the capacity to handle the rise in admissions that happens every winter. It desperately needs staff, beds and equipment. Elements in the Tory party would no doubt like to seize this opportunity to bring in private providers, but Sunak should resist them. It would disrupt an already over-stretched NHS management, and it would be unpopular with voters.

Second priority must be supporting those who are self-isolating and/or ill. The CBI has proposed extending sick pay to people who are self-isolating and to those on low incomes, together with cash flow support for businesses paying extended sick pay. Others have suggested ending the five-week wait for Universal Credit and extending it to self-employed people who currently don’t meet income criteria. But a more radical approach would be for Government to pay people a basic income while they are unable to work. This would be far simpler than tinkering with Universal Credit, and would also relieve struggling businesses of the need to maintain sick pay.

Third priority needs to be business support. Cutting VAT by 2.5% would be a fast-acting measure to support businesses and stimulate the economy. Sunak should also honour the promise to raise the threshold for workers to pay NI insurance, and give employers a temporary National Insurance holiday to support their cash flow: the Government should credit workers with the missing employers’ NI to avoid impacting their future state pension entitlement. Sunak could also consider a handout of say £1,000 to everyone to stimulate spending, perhaps with the support of the Bank of England.

Pandemics are nasty, but they don’t last forever. So Sunak’s Budget also needs to look ahead to the post-crisis economy. There are several critical investment needs:

  • The NHS, so that it better meets the needs of an ageing population
  • Secondary and further education, particularly in the “left-behind” areas where skills are low and well-paid jobs consequently hard to come by
  • Transport to improve connections both between and within cities, towns and rural areas, particularly though not exclusively in those same “left-behind” areas

On the day-to-day spending side, Sunak is under pressure to provide more funding for police and crime, and for immigration services. The Chancellor should also commit to reforming business rates and reviewing the funding of local authorities. Sadly, despite its unpopularity and the growing evidence that it is not fit for purpose, reforming Universal Credit is likely to end up on the “too difficult” pile for this Budget, along with social care and the unsatisfactory funding arrangements for universities. All of these should feature in future Budgets, though.

Paying for all of this will not be easy. Clearly, some taxes will have to rise. Fuel duty is an obvious choice, given the fall in oil prices, and Sunak has already signalled that he intends to end Entrepreneurs’ Relief. But raising taxes is unpopular with Tory MPs: some ideas have already been dropped.

That suggests much of this expenditure will have to be funded by borrowing. Not that the Government will have to pay much in the way of interest: gilt yields beyond 10 years are now virtually zero. But the Government’s commitment to balance day-to-day spending by 2023 is undoubtedly toast. Reclassifying certain types of spending as investment might get round this rule, but in my view it would be more honest to tear it up.

This is primarily a Budget for a panic. But if Sunak keeps his nerve and faces down those who would use a crisis as a means of furthering their agenda, he can pave the way for sensible spending reforms and investment programmes in the not too distant future.

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Frances Coppola writes about economics and finance.