The Spring Budget special Top of the Charts 5 March 2021 Torsten Bell Sign up for our weekly Top of the Charts reading email Afternoon all, The schools are mainly closed, but there is still an ‘end of term’ feel in the RF virtual office. Happy coincidence means the Budget, a big driver of our workload/sleep deprivation, is done exactly as water torture home schooling draws to a close. The euphoria is only slightly dimmed by the reality that celebrating these days just involves another night in with that special pandemic friend, Netflix. Anyway, as it’s Budget week TOTCs brings you a Budget special. We’re imaginative like that. And if that’s not enough for you, check out our full 50+ pages of Budget analysis. If that doesn’t scream celebration, I don’t know what does. Have a great weekend all, and parents (in England) look forward to waking up on Monday and mouthing to yourself those immortal words: today we celebrate our Independence Day. Torsten Bell Chief Executive Resolution Foundation We got a big Budget this week – bigger than many of us expected. But even a big Budget can’t do everything. Two days on, what does it show us about the Government and where it does, and doesn’t, have a strategy? Covid strategy Most obviously the Treasury is sticking to the existing, and broadly correct, strategy for this pandemic: spend big till it’s done. The Chancellor extended short-term crisis support up to and beyond the planned summer end of public health restrictions. Continuing furlough to September will reduce the coming rise in unemployment, with the Office for Budget Responsibility (OBR) forecasting a peak of just 6.5 per cent (vs 5.1 per cent today). That would mean the deepest downturn in over three centuries having the lowest unemployment peak of any recent recession. Fingers crossed this forecast is right. Extending self-employment support to those who filed a 2019-20 tax return is right on fairness grounds. But two-thirds of self-employed workers who have needed, but were excluded, from support so far remain ineligible. Continuing the £20 a week Universal Credit uplift for six months offers support now, but delays rather than removes a huge income hit for the poorest families in Britain. Together with more grants for hard-hit firms, these extensions mean overall crisis spending will now total over £340 billion, or £12,400 per UK household. As a result, borrowing will hit £234 billion in 2021-22, £70 billion more than previously thought. Big spending plus vaccine success means the OBR thinks a slightly stronger recovery is in store later this year and early next: GDP is forecast to return to pre-crisis peak six months earlier than previously thought in the second quarter of 2022. Fiscal (and political) strategy More surprisingly the Chancellor now has a fiscal strategy: stimulate today (with £67 billion of further stimulus over the next two years) and raise taxes (a lot) tomorrow. In both cases he did more than expected, and put British firms at the centre of the action. The one big recovery boosting move was a £24 billion tax incentive for business investment over the next two years. The goal is to unlock some of the £118 billion corporate cash pile built up mid-pandemic, boosting the recovery and addressing our long-standing investment weakness. The temporary nature of the measure means it’s likely to do the former but not the latter, by bringing forward investment from future years. The good news for firms investing soon was matched by bad news for those hoping to make profits in future. A £17 billion rise in Corporation Tax to 25 per cent (from 19 per cent now) made up the vast majority of the biggest set of tax rises in a Budget since 1993. Companies making low levels of profits will be (mistakenly) protected, but this is by far the biggest rise in Corporation Tax for half a century. Freezing tax thresholds made up the rest of the Chancellor’s consolidation. £8 billion will come from freezing the Income Tax personal allowance and higher rate threshold until 2025-26. This brings more people into paying income tax, but still leaves the personal allowance 50 per cent above its 2010-11 level. It’s progressive too, with the top fifth paying £826 per year more on average – twelve times more than the bottom 20 per cent of households (£56). These tax rises combine to mean that the deficit returns to ‘normal’ levels by the middle of this decade. This is a clear fiscal strategy, and the shape (if not the scale) of it is right in spending today, taxing tomorrow. But it’s also a total U-turn on the former Conservative Chancellor George Osborne’s ‘growth strategy’ of lower corporation tax and a lower deficit. With tax as a share of the economy rising to the highest level since the 60s it’s also a big shift for the traditionally low tax party. The scale of that change in approach reflects the fact that the Chancellor also has a political strategy – to rewind the clock back to the time pre-Brexit when debates about the prudent management of the public finances were centre stage in British politics. Post-Brexit economic strategy What the Budget did not have is any sense of how Britain’s economy will succeed in the years ahead. There was little on the net zero transition, while the high value-added service industries that were deprioritised in the Brexit deal are also forgotten in the nature of the investment stimulus announced (it covers plant and machinery, not intangible investments). A key part of the Government’s levelling up plan is to spend large amounts of capital spending in the North and Midlands, and the the way it is going about it clearly has much more to do with politics than economics. The focus of spending and rhetoric is on towns (which are now the marginal seats in British politics) rather than the underperformance of our city regions (the root cause of the UK’s productivity gaps). More generally the danger for Britain is that our disastrously low growth of the last decade simply becomes what we expect and therefore normal. The scale of our shrinking ambitions about what normal growth looks like can be seen from the declines in medium term growth forecasts from around 2.5 to 3 per cent in 2010 to almost half that today. Whenever people say we need to move beyond caring about GDP, remind them it’s actually the truly dreadful lack of it that has seen our household incomes stagnate for the past decade. The latest OBR forecasts imply that average total earnings won’t return to 2008 levels until the middle of the decade, a horrifying 18-year downturn. The pandemic will also leave earnings permanently £1,200 lower than expected pre-Covid. Post-Covid social strategy While the Chancellor is spending big right now on Covid, there are other senses in which his approach almost ignores the fact that the pandemic has happened. Two stand out.In supporting the recovery his approach focuses on firms not families, broadly assuming that, having supported households during the pandemic, their consumption will bounce back automatically once restrictions are lifted. That seems likely in sectors like hospitality, but it’s far less certain for the economy as a whole. On balance it’s a gamble with the strength of the recovery I wouldn’t be taking. The Chancellor’s post-pandemic approach also doesn’t recognise the very different impact of the last year where richer households have built up savings, while poorer households have taken on more debt. It is the latter that will lose out when the Chancellor ends the £20 Universal Credit uplift in October, just as unemployment will be rising fast. The right strategic answer to this very unequal downturn is not to take the basic level of benefits back to its lowest rate since the early 1990s, and reduce the incomes of the poorest households by 7 per cent in the second half of 2021-22.The Chancellor’s approach to public services is also unlikely to last once it meets post-Covid reality. While plans for the highest level of investment spending since the 1970s were maintained, day-to-day public service spending is in for a tougher ride. That’s not because we are returning to austerity as some claim – total public service spending is rising. But the Treasury are under-estimating spending pressures post-Covid, actually reducing planned spending by £16 billion a year. This is hard to reconcile with the backlog of hospital operations and demands to sort out social care. The legacy of austerity, and of prioritising NHS spending, for unprotected departments (think local government and prisons) will live on with their day-to-day public service spending falling in 2022-23 and remaining a quarter lower in 2024-25 than in 2009-10. For those public services it will feel very much like George Osborne is still the Chancellor. So, a bigger than expected Budget leaves the Chancellor with a Covid, a political, and a fiscal strategy. But there is little sight of an economic strategy that recognises Brexit has happened, or a social one that sees where Covid leaves us. And in the end these latter gaps are not separate from the former plans, they are the reality that will make sticking to the approach set out in this Budget far from plain sailing.
