Encouraging for our immediate future ... but what lies beyond?

THIS Budget was as crucial as any in living memory, with a host of complex issues for the Chancellor.

He duly set out his plans in three parts – enhanced support in the short term; putting the UK economy and public finances on the road to medium term recovery; and starting the process building an economic model suited to the longer term.

He has been extremely generous – especially to business – for the immediate future; provided some interesting ideas for the next phase, but with a thumping increase in Corporation Tax from 2023; and really said very little about how to address a range of burgeoning inequalities. This was certainly not a Budget focusing on major transformations. But maybe that was inevitable given the immediate priorities.

Consider first a few key figures, as provided by the independent Office for Budget Responsibility. The OBR now expects GDP growth of 4 per cent this year and 7.3% next, bringing national income back to the pre-covid level by mid-2022. This is six months earlier than previously expected. Nevertheless UK GDP in five years is still expected to be 3% lower than would have been the case without the pandemic.

The OBR is much more optimistic than previously on unemployment, now expecting a peak of 6.5% rather than the July 2020 forecast of 11.9%. If they are right (figures are subject to massive uncertainties) that would mean a reduction in the numbers unemployed at that peak of 1.8 million. Let us hope this optimism is fulfilled.

The other OBR numbers which matter most relate to the public finances. The level of the annual deficit is now expected to reach £234 billion (10.3% of GDP) in 2021/22. This is up on previous estimates, essentially because of the extension of generous support schemes for business in particular. The forecast level of deficit falls off sharply from 2022/23, declining to just 3.5% of GDP in 2023/24.

The stock of Government debt is expected to peak at 97% of GDP in 2023/24 – carefully below 100%. While thankfully Mr Sunak did not offer up any new fiscal rules, he did note that we should invest while the cost of debt service was low, but keep a watch for any sign of increases in inflation and hence interest rates.

There are two elements relevant to these public finance forecasts which merit emphasis. First, the spending cuts announced in late 2020 have not been reversed and no plans were trailed for increased funding for health, education and local authorities – where we can expect huge pressures for more funds. The Chancellor’s position here may not be sustainable. Second, the improvement in the forecast is very reliant on the much greater than expected increase in Corporation Tax (up to 25% for larger companies) from 2023. Will such a move prove feasible in the final year of a “business friendly” Conservative Government wishing re-election?

The Chancellor has rightly been very generous in extending the furlough scheme and support for the self-employed. The holiday on business rates is extended to the end of the year, with an 80% cut also for the following three months; and special support to hospitality, tourism and the housing was confirmed along with other grants and loans to retail and other sectors. He has extended the uplift in Universal Credit, but just for six months.

All of this should ensure relatively speedy recovery over the coming 12 months, provided no further lockdowns prove necessary. We can be less confident about his expectation of accelerated growth thereafter. This will depend on a major pick up in business investment. But this acceleration will also require major efforts on skills development and encouraging innovation and productivity, where his proposals are more opaque.

During the pandemic, inequalities across our economy has become more evident. But there was no reference of substance to special measures for young people or any review of arrangements for social care or measures to support the less well off; no mention either of genuinely progressive tax changes.

Overall this was encouraging for the immediate future, but we still do not know what lies beyond.