Spare a thought for Rishi Sunak. He’s less than four weeks into a new job role and his big set piece just got more daunting.
The government’s first Budget was supposed to be a well-rehearsed show-stopper. A platform for the chancellor to set out both his vision for the economy post-Brexit and the detail of how it will be delivered. The moment when the Conservatives start delivering on the promises that swept them to a landslide victory last December.
After years of fiscal consolidation Boris Johnson wanted his chancellor to let rip. The plan was for a spending blizzard, of infrastructure investment, climate change policy commitments and “levelling-up” pledges designed to address geographical inequality across the UK.
These things will still be trumpeted but in the last fortnight Rishi Sunak‘s Budget speech has had to be radically rewritten. All the attention today will be the emergency response he delivers to soften the economic damage that the Coronavirus outbreak will cause.
Both the virus and the measures imposed to contain it have the potential to trigger a very nasty recession. School closures risk leaving companies short-staffed, quarantines will kill high-street trade. And who, other than the extremely courageous, would book an airline ticket currently for a holiday this summer.
Economic disruption looks inevitable now. The chancellor needs to serve-up something that limits the number of businesses that fail, the number of workers that are laid off and keeps public services - most importantly the NHS - functioning.
The problem of sick pay urgently needs solving. Millions of low paid, self-employed and zero-hour workers don’t qualify for it. If self-isolation is the government’s chosen way of slowing the spread of the virus then this needs rethinking. As it stands, there’s a strong incentive for those who suspect they may be ill to head in to work regardless.
Businesses groups want a hardship fund they can dip into if the cash runs out. They may not get it but expect the chancellor to unveil tax holidays for otherwise healthy companies who find themselves suddenly up against it. VAT, Business Rates, even Employer National Insurance payments could all be deferred.
The likes of RBS, TSB and Lloyds have already publicised their forbearance policies, reminding homeowners that breathing space can be requested. But the action is piecemeal. The Chancellor can to deliver something more coordinated and substantial. Using taxpayers money to underwrite bank loans is clearly being considered.
The Bank of England surely has a prominent role to play. Now would be good time to revive its Term Funding Scheme, introduced after the shock of the EU referendum result, to ensure banks have ongoing access to cheap funding. The Budget would seem a sensible time to announce it.
The chancellor’s measures will almost all be aimed at the “supply-side” of the economy. Demand, thus far, has mostly held up. Tax cuts to encourage households and businesses to spend would likely prove both expensive and ineffective until the spread of the virus is deemed under control.
The aim here is to prevent a short, sharp economic shock from causing long-term damage. The chancellor needs to come up with a package of measures on a scale that is large enough to be compelling. This will cost money, money that the chancellor can’t easily rustle-up.
Economic growth is forecast to be weak and the government’s fiscal rules constrain what can be borrowed. The COVID-19 outbreak is a marvelous opportunity for the new chancellor to ditch, or at least overhaul, them.
The self-imposed restrictions were drawn-up before the election by his predecessor, Sajid Javid, and were designed to demonstrate that, in government, the Conservatives would spend realistically and responsibly.
The pledge to balance day-to-day spending within three years, on a rolling basis, now binds the hands of a government whose instinct is to spend freely.
Javid fought to get the fiscal rules included in the manifesto. The informed, chattering classes will tut if they are redrafted but the average voter is unlikely to feel betrayed and investors have never been happier to stuff money into the government’s pockets.
Last August Boris Johnson made up a fiscal rule of his own before never mentioning it again. He briefly promised that national debt would fall in every year of the parliament if he became prime minister.
Breaking this pledge would enhance the government’s reputation for flakiness (not that it’s done it any obvious harm thus far) it would also be rather brave. The UK’s stock of national debt is now double what it was before the financial crisis and it cannot keep rising indefinitely. Interest rates maybe low but at some stage in the future the music may stop.
The government says it is committed to low-taxes but in the run up to the Budget stories of proposed tax rises were leaked to the press.
Entrepreneur’s Relief looks for the chop. Tax hikes will likely be directed at wealth rather than income, although a Mansion Tax looks unlikely and any proposal to introduce a new flat rate of pension tax relief (a tax cut for low earners, an increase for those on high incomes) would likely be consulted on before being introduced.
Somewhere in his speech the chancellor should announce how big the pot of money will be for government departments from 2022 and beyond. As it stands, some still face significant cuts going forward. Outside health, which has been repeated prioritised and protected, the IFS calculates that spending on public services per person has fallen by 26% since 2010. We wont find out the full departmental allocations until the full Spending Review in the summer.
The chancellor will have plenty room for manoeuvre on investment spending. £100 billion has been promised over the next five years, look out for the detail on where it is being spent. The expectation is that the Midlands and the North of England are about to get a pampering as the government finally delivers the funding to necessary for it “Northern Powerhouse” project to be taken seriously.
The government’s capital spending plans should be eye-catching. In normal times they would command the headlines but these are not normal times.