From tax to in­fra­struc­ture, Bud­get can of­fer a roadmap be­yond Covid

Au­tumn an­nounce­ment gives Su­nak chance to re­spond to sec­ond wave and job cuts,

The Daily Telegraph - Business - - Summer Statement - says Tom Rees

Gov­ern­ments rarely get to choose the mo­ments that de­fine them but can de­cide how they re­spond, Rishi Su­nak said at the des­patch box on Wed­nes­day. The suc­cess of the Chan­cel­lor’s lat­est pack­age will surely help de­ter­mine his own place in his­tory.

Su­nak sig­nalled that the pol­icy blitz was the sec­ond phase of a three-step plan to right the ship, with the last stage com­ing dur­ing the au­tumn. But what does Su­nak have left in the locker?

This week’s mini-Bud­get was worth up to £30bn, or 1.5pc of GDP, but Robert Wood, the Bank of Amer­ica econ­o­mist, warns the stim­u­lus is a “drop in the ocean com­pared to what has al­ready been done”. The pack­age sets the stage for more eco­nomic aid in the au­tumn be­fore of­fi­cials are forced to make hard choices on whether to tol­er­ate or rein in higher debt lev­els.

By then, the shape of the recovery and suc­cess of cur­rent poli­cies will be much clearer. Su­nak will know whether the ta­per­ing and end of the fur­lough scheme trig­gers mass job losses. And of­fi­cials will cru­cially know whether a dreaded sec­ond wave of Covid-19 in­fec­tions ever knocks the recovery off course.

Ja­cob Nell, Mor­gan Stan­ley econ­o­mist, says: “So far, the UK fis­cal re­sponse has been dom­i­nated by de­fen­sive sup­port for con­strained sec­tors, rather than more for­ward­look­ing and ef­fec­tive in­vest­ment in, for ex­am­ple, green and dig­i­tal projects.”

Nell ex­pects a fur­ther £40bn of mea­sures to be added in sup­port on top of Wed­nes­day’s pack­age. Be­fore Covid-19 struck, the Con­ser­va­tives were elected on a man­i­festo that had al­ready promised higher spend­ing and an “in­fra­struc­ture rev­o­lu­tion”.

While the £5bn of in­vest­ment set out by Boris Johnson last week left some dis­ap­pointed, the Prime Min­is­ter re­turned to the rhetoric of “lev­el­ling up” the coun­try. “The in­ten­tion was to step up spend­ing sig­nif­i­cantly on in­vest­ment,” ex­plains George Buck­ley, econ­o­mist at No­mura. “It kills two birds with one stone, be­cause not only are you de­liv­er­ing on your man­i­festo prom­ise but you are also help­ing to shore up the econ­omy.”

Paul Johnson, di­rec­tor of the In­sti­tute for Fis­cal Stud­ies, says the au­tumn Bud­get will al­low the Chan­cel­lor to use “more tar­geted sup­port”.

He says that could mean “tar­geted tax cuts”, “more thought-through in­vest­ment pro­grammes” and “more de­vel­oped job sup­port schemes”.

The huge blow to the pub­lic fi­nances de­liv­ered by Covid-19 could af­fect such plans, how­ever. Pub­lic debt is ex­pected to be much higher than pre-virus lev­els, hit­ting more than 100pc of GDP for the first time since the Six­ties. This au­tumn, the Chan­cel­lor will set out de­part­men­tal bud­gets for the com­ing years at the spend­ing re­view. He warned on Wed­nes­day: “We will deal with the chal­lenges fac­ing our pub­lic fi­nances. Over the medium term, we must, and we will, put pub­lic fi­nances back on a sus­tain­able foot­ing.”

How­ever, Buck­ley be­lieves that the Govern­ment is un­likely to re­turn to aus­ter­ity. Ul­tra-low in­ter­est rates have re­duced the risk of the pile and the UK will be far from alone in hav­ing a debt mountain as large as its econ­omy.

Ger­ard Lyons, a se­nior fel­low at Pol­icy Ex­change and Johnson’s for­mer chief eco­nomic ad­viser, says the Govern­ment must pur­sue a “cred­i­ble

‘The next bat­tle is to rule out tax rises. We have low rates and yields, giv­ing Su­nak the abil­ity to bor­row’

pro-growth strat­egy that al­lows the debt ra­tio to come down steadily”.

“The next bat­tle is to rule out tax rises. We have an en­vi­ron­ment of low rates and yields that gives him the abil­ity to bor­row,” he says.

Lyons says the Chan­cel­lor should fo­cus on cut­ting taxes on in­come and in­cen­tivis­ing the pri­vate sec­tor. He adds that govern­ment loans may need to be con­verted into equity or turned into grants. The Chan­cel­lor’s job is far from done. Su­nak’s next pack­age will not only cap off his Covid-19 re­sponse but could pro­vide the Govern­ment’s roadmap for years to come.

Boris Johnson, the Prime Min­is­ter, un­veiled £5bn in in­fra­struc­ture in­vest­ment last week

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