The Chancellor’s crisis management has been excellent. The Budget was another reflection of that, as Rishi Sunak unveiled further significant, targeted support to the areas of the economy that needed it most.
Over the last year, fiscal policy has acted as the main shock absorber for the economy. Including measures announced today, a massive £352 billion has been spent on Covid support. This approach has been fully justified, with low inflation, rates and yields providing ample fiscal space. Debt dynamics have allowed the government to borrow cheaply from investors.
Also, as we have seen over the last year, the Bank of England’s Quantitative Easing programme has led it to become the biggest buyer of gilts. The Bank still plans to be printing money and buying gilts until this autumn. At some stage fiscal and monetary policy may have to return to normal. But not now. As Saint Augustine might have said, ‘make me chaste, but not yet’.
The Chancellor avoided squeezing the economy this year or next. Planned tax increases are being delayed until after the economy has recovered. That makes sense economically, but perhaps not politically with a general election due in 2024. Tax increases are focused on a freezing of personal income allowances from the higher level they will reach in 2022 and on raising corporation tax from 19 to 25 per cent, with a lower rate for smaller firms. There were no higher taxes on pensions or capital gains despite much pre-Budget speculation.
The Budget’s measures, alone, added another boost of £6.1 billion to the economy in this fiscal year, a mammoth £58.9 billion in the year-ahead and a still large £7.8 billon in the year after that. Then, as we approach the next general election, higher taxes lead to fiscal tightening of £13.1 billion beginning in 2023, £25.0 billion in 2024 and £29.7 billion in 2025/26.
As with his predecessors, the Chancellor unveiled many interventions – too many, some would argue. 53 new policy decisions were announced today: 17 to help the economy through the pandemic, 4 to boost investment and 19 to bring in more taxes. The remaining 13 were small tweaks to already announced plans.
Unlike his predecessors, however, the Chancellor sensibly avoided any fiscal rules. Previous rules lacked credibility and did not stand the test of time. Instead, the Chancellor opted for some sensible fiscal principles, focused on providing support now, not allowing the debt to keep rising and aimed at taking advantage of low borrowing rates to boost investment. However, he stressed how sensitive the fiscal sums are, with a one percentage point increase in yields costing £25 billion per year. This suggests the Chancellor will adopt a flexible future approach. This was reflected today in some of his specific measures. There is to be a temporary, generous new super-tax deduction scheme aimed at boosting investment this year and next.
Sensibly, the furlough scheme is to be extended and will be phased out later this year, by which time the economy will be recovering. This should help to limit the rise in unemployment. Indeed, the Office for Budget Responsibility (OBR) now sees the unemployment rate, which is currently at 5.1 per cent, peaking at 6.5 per cent. While still high, this is far lower than previously feared.
One specific measure was aimed at the housing market. The commitment to turn generation rent into generation buy has faltered, largely because there has not been a pipeline of first-time buyers. Many who would like to buy have not been able to afford a deposit. This may now change, as the Chancellor announced a new mortgage guarantee scheme. This is to help people save for a 5 per cent deposit and it will be supported by lenders, who will provide 95 per cent loan to value mortgages, which as I argued in a recent Policy Exchange paper, will help get first-time buyers on the property ladder.
Another notable measure was the focus on the green agenda. Given the ambitious aim to achieve a net-carbon zero economy by 2050, we should expect an increased and welcome focus on growing the green economy. Today’s plethora of measures include a newly capitalised National Infrastructure Bank
I expect the economy to rebound strongly over the next year. In turn this should allow the fiscal numbers to improve significantly and it would not surprise me if it allowed the Chancellor to reign back on some of his planned tax hikes.
The OBR forecast is for the economy to grow 4 per cent this year and 7.3 per cent the year after. They see the economy returning to its pre-crisis level by summer 2022. To put this into perspective, the economy at the end of this month will be back at the level of activity last seen in 2014. There is nothing magical about that. It just shows how weak things are now. But within 15 months the OBR is effectively predicting the equivalent of six years of growth, from where we were in 2014 to where we were in 2020 in just over a year. That is a solid recovery and yet it may prove to be even stronger than the OBR expects, given the successful vaccine roll-out, future unlocking and pent-up demand.
However, the OBR then predicts growth decelerating to only 1.7 per cent in 2023, 1.6 per cent in 2024 and 1.7 per cent in 2025. Despite all the good news today, the UK still lacks a longer-term market friendly economic strategy. While the Chancellor was right to provide support, the future focus should be on how to incentivise the private sector and that has to include lower taxes and smarter regulation.
For now, though, this Budget’s message was the health and economic crisis are now coming to an end. We should then expect a strong recovery, leaner future public finances and a green recovery. Stronger, leaner and greener.