£200 billion spending increase to tackle coronavirus and end austerity sees Chancellor turn on borrowing taps

The Chancellor decided to borrow an extra £108 billion in order to announce £206 billion of extra spending in his Budget, the Resolution Foundation said today (Wednesday) in response to the Budget.

The Budget combined an immediate £12 billion package to tackle coronavirus with much bigger and longer-lasting spending increases to end austerity.

The spending increases came against the backdrop of an incredibly weak economic outlook from the Office for Budget Responsibility, even without taking into account the economic impact of coronavirus.

Cumulative growth for the next five years is forecast to be 7.3 per cent – nearly a quarter below that seen during the sluggish post-crisis decade. An inevitable coronavirus-related downgrade to growth this year, even if just of 0.2 ppts, would make this the weakest official five-year growth outlook ever published.

Welcome measures to tackle the economic impact of coronavirus included quicker payments of contributory Employment and Support Allowance (ESA) and a temporary suspension of Universal Credit’s (UC) self-employed income floor, in order to protect the incomes of self-employed workers who need to take time off work to self-isolate. Significant help for firms in the coming months is also welcome, and should reduce any increase in unemployment in the months ahead.

However, the government’s failure to extend Statutory Sick Pay (SSP) to two million low earners is unwise, leaving them reliant on UC with its waits and means tests. The Foundation notes that with SSP set at £94.25 a week, and UC and ESA worth just £73.10 a week (or £57.90 for under 25s), a typical self-employed worker on £284 a week could still face their primary income falling by three-quarters if they need to self-isolate, while a typical worker eligible for SSP only would lose over two-thirds of their normal pay.

The Foundation welcomes the coordinated policy action with the Bank of England today in order to support the wider economy. It notes that the £30bn fiscal stimulus package this year is equivalent to 1.3 per cent of GDP – bigger than that seen in most other countries so far.

Looking at the overall spending package, the Chancellor decisively brought an end to the era of austerity, with big increases in current and capital spending.

The extra capital spending, including for R&D – the biggest increase in public investment for decades, to the highest sustained levels in 40 years – is enough to offset all of the cuts to capital spending since 2010.

The Foundation calculates that the increase in current spending would reverse around a quarter of cuts to unprotected departments (outside health, defence and international development) since 2010. None of the austerity for family budgets from social security cuts was reversed, meaning that child poverty is likely to continue rising over the course of the parliament.

The Foundation notes that the Budget marks a seismic shift in the government’s approach to the public finances.

In less than five years, the government’s ambition has gone from shrinking the state in order to run an absolute surplus, to growing public spending to almost 41 per cent of GDP, and actively aiming for a higher deficit than Gordon Brown averaged as Chancellor.

The chancellor is projected to meet his fiscal rule, but the goal of seeing debt fall over time has also been jettisoned in practice, with debt now flat – rather than falling – from 2021-22 onwards. Understandably given the scale of this change in approach, the Chancellor announced a review of the fiscal framework.

Compared to the increases in spending, there were only very modest changes in taxation. That included welcome steps to reduce the maximum gain from Entrepreneurs’ Relief from £1m to £100,000 and end further falls in the corporation tax rate.

A small national insurance cut of up to £85 a year will benefit around 30 million workers, though the Foundation notes that low income households on Universal Credit will receive only £32 of that.

In addition, the fuel duty and alcohol freeze, and small changes to VAT, will save the average household around £30 a year. While future reviews of Business Rates and Vehicle Excise Duty were promised, the Chancellor ducked more difficult issues around the taxation of pensions, property and inheritance taxes.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The new Chancellor today delivered a big Budget, combining a significant coronavirus response with a fundamental resetting of the government’s approach to the public finances.

“Against a gloomy economic backdrop showing a weaker growth outlook for the 2020s than we saw even in the sluggish post-crisis decade, the Chancellor decided to spend £200 billion more, with higher borrowing taking most of the strain.

“Significant action to support firms affected by coronavirus is very welcome and should help ensure the temporary shock does not do them lasting damage. In contrast to significant help for firms, targeted support for families affected by coronavirus was less evident. Self-employed people becoming ill will see faster benefit payments, but the government has left two million low-paid employees ineligible for Statutory Sick Pay.

“For the years ahead, the Chancellor has increased public spending significantly while being very reluctant to raise taxes to pay for it. While the Conservative government even a few years ago aimed for a smaller state and zero borrowing, these plans mean a bigger state than under Tony Blair paid for by more borrowing than Gordon Brown.”