Barely a year has passed since Rishi Sunak’s first Budget. Its centrepiece was a £30 billion stimulus designed to calm nerves about Covid-19 even though barely 500 cases had been diagnosed in the country. The Commons chamber was packed, with not a mask in sight. Few that day would have thought that in a year’s time the country would be in its third national lockdown and the economy would have suffered its worst slump since the Great Frost of 1709.
The pandemic has made a mockery of nearly every optimistic prediction. The government is now moving with extreme caution. Even though vaccines have a greater effect with every passing day, restrictions won’t finally be removed until 21 June. The furlough scheme, which has cost £54 billion so far, has been extended until the end of September. The length of this shows both government nervousness about the pace of easing restrictions and fear about how taking away support quickly could lead to a spike in sackings. Mass unemployment is one of the biggest risks this country faces when the pandemic is over.
Science is winning the fight against the virus, though. Vaccines are proving more effective than predicted: one dose of either Oxford-AstraZeneca or Pfizer-BioNTech cuts the risk of hospitalisation in the over-eighties by 80 per cent. Given that deaths among the over-seventies account for more than 80 per cent of all Covid-19 fatalities in England and Wales, this severely limits the potential for a deadly third wave.
Take-up of the vaccine has also been extremely high so far. In Whitehall there is hope that 90 per cent of adults will get jabbed. This gives grounds for optimism that nearly all social distancing measures may be able to go on 21 June.
There will be a political fight about this. Advocates of the cautious approach argue that risk should be minimised as restrictions are eased and so socially distancing measures should only be eased gradually. But others will pile on pressure to scrap the one-metre rule given that those who account for 99 per cent of Covid deaths and hospitalisations will have had at least one vaccine dose by June. If that happens, pubs, restaurants, shops, theatres and the like will be able to operate at full capacity, which will allow for a strong economic recovery.
Ministers are encouraged by figures that show households have accumulated £160 billion extra savings since the last Budget. They are optimistic that, as the economy reopens, people will go out and spend. Tellingly, this week’s Budget wasn’t about trying to stimulate consumer consumption. The view in government is that a nation of frustrated shoppers will need little encouragement once the all-clear sounds. But how much of the extra savings will be spent? The Bank of England monetary policy committee estimates £8 billion; other research suggests it could be as high £50 billion. Andy Haldane, the BoE’s chief economist, has expressed worry that if people rapidly spend their savings this could push up inflation.
The revival of business investment is another matter. Lockdowns have left many firms desperately short of cash. The danger is that this leads to delays to investment in new technology and machinery, which would worsen the UK’s longstanding productivity problem. This is why the Budget contains a so-called ‘super deduction’, which means that for the next two years businesses can deduct 130 per cent of the cost of a capital investment. The hope is that this will encourage firms to make investments now, rather than delaying them.
Being able to write off more expenses against tax will also make the coming increases in corporation tax more palatable. Much has been made of George Osborne’s repeated corporation tax cuts, but in truth the headline rate was accompanied by a tightening in the rules surrounding deductions which blunted its effectiveness. This new approach to corporate taxation should particularly benefit manufacturing businesses, boosting the levelling-up agenda.
Sunak’s first year as Chancellor has seen him borrow close to £300 billion — more than Gordon Brown borrowed in nine years. But for the 20-odd years I have known Sunak, he has been a fiscal conservative. He sees the extra debt and spending now as a necessary response to Covid, designed to aid a fast economic recovery once the pandemic is over.
Sunak’s room for manoeuvre in this crisis has been, in part, because the public finances were in reasonable shape before it. His concern about debt has long been about the cost of servicing it (which remains low) rather than its precise level. But the debt pile is now so large that small movements in interest rates have big consequences. His plan to raise corporation tax in the future is meant to show that he is serious about putting the public finances on a sounder footing.
For that, he’ll need growth. Tax rises will be tricky given the Tory manifesto pledge not to raise income tax, National Insurance or VAT. Spending cuts are hard too given the sheer number of commitments that the Tories have made. Far more impressive growth than we have seen in recent years will be required to make the public finances more sustainable. Given there is no room for tax cuts, changes to regulations could do the most good. The government must push on, despite concerns on the Tory benches, with a zonal planning system which is by far its most significant supply-side reform.
If it were not for the pandemic, this Budget would be judged as the first since Britain left the single market and the customs union. While there was a sign of how the government intends to use these newfound freedoms in the announcement of a batch of free ports, this was ultimately another Covid Budget. The vaccination programme remains this government’s most important economic policy since it’s the way the country will eventually return to normal. There are also wider lessons to learn from its success. The vaccine rollout was possible because of innovation and fast-moving regulators. The same combination could help generate the growth needed to make the public finances sustainable in the long term.
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