From tax to infrastructure, Budget can offer a roadmap beyond Covid
Autumn announcement gives Sunak chance to respond to second wave and job cuts,
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