Two Budgets are better than one
IT IS the Budget again on Wednesday, but this time our new Chancellor, Rishi Sunak, has to have two Budgets in one. There has to be an emergency Budget to respond to the economic impact of coronavirus. And there has to be a structural one setting out the Government’s longer-term plans.
The key to the emergency one is flexibility. There will in all probability be a recession this summer, with the bounce-back coming through in the autumn.
January showed some growth but looking at what is happening in February, growth over the first three months of this year is likely to be negative. And the more successful we are at delaying the peak of the epidemic, the later the recovery. So the second three months are likely to be negative too. This is different from most recessions. We are dealing with two shocks.
One is to the supply chain, with manufacturers finding they cannot get components and have to cut back production. The other is to demand, with people cutting back in a variety of ways, including not flying or going out so often for restaurant meals.
The emergency Budget has to help businesses to get through this increasingly tough period. That will not be easy, because the economy is far too complex for a government to fix things by spending a bit more money.
So we should be looking for carefully targeted help. This could include loan guarantees to businesses hit by the sudden slump in demand, but the key is flexibility. We certainly need a contingency fund which companies can dip into and we may need some tax holidays. No one will mind the deficit going up a bit, provided the rise is temporary.
That leads to the other Budget, the strategic one. Every Budget there is the tired old debate about the room the Chancellor has for ‘giveaways’. What we need is something bigger: an assurance that the Government won’t borrow to finance current spending, and that it will instead borrow to finance genuine investment in our future.
The detail of the big infrastructure drive we’ve been promised by Boris Johnson will have to wait until the autumn – and given the uncertainties now, that makes sense.
But remember that interest rates on government debt are historically low, ironically even lower as a result of coronavirus. So it also makes sense to borrow now for future spending.
What will that do to projections for the deficit over the next five years? Well, Chancellors have to take that into account and there will be earnest debate about what extra borrowing will do to the numbers. But don’t take them too seriously, for we know from past history they will be wrong.
The new Chancellor will obviously hope for some votecatching headlines, as well. This is politics after all, and populist governments are supposed to do things that are popular. Nothing wrong with that. But two pleas.
One is, please no mistakes. There have been plenty of unforced errors in the past. Look at the mess over pensions or the damage to the buy-to-let market from tax grabs. Remember George Osborne’s description of his being on a 5:2 diet: ‘After two of every five Budgets, I eat some of my own words.’
The other is, please simplify, simplify, simplify. There was a survey last week that reported that companies preferred simplification of taxes over cuts in rates. I suppose that would depend on the scale of the cuts, but we do manage to have one of the most complex tax codes in the world. It is about 20,000 pages long. Hong Kong’s is fewer than 300 pages. We should not expect Sunak to fix that in the five weeks he will have been in the job, but maybe he can set simplification as a clear aim, not a vague aspiration.
A final point. We will shortly have a new Bank of England Governor, Andrew Bailey, and we must hope he establishes a strong working relationship with the new Chancellor. The initial signs are encouraging. At the incoming Bank boss’s first appearance at the Treasury select committee last week, he noted there would have to be ‘some way of providing supply-chain finance’ for companies caught by coronavirus disruption. That is a good example of the targeted support that the Government needs to give to nurse the economy through a tough spring and summer.
Two pleas: no mistakes and make tax simpler